UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended June 30, 1999

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to

                           Commission File No.: 1-5270

                              SOFTNET SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

              Delaware                                  11-1817252
   --------------------------------        ---------------------------------
   (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

650 Townsend Street, Suite 225, San Francisco, CA          94043
-------------------------------------------------      --------------
   (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code:  (415) 365-2500



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                            (1)     Yes X    No
                                       ---     ---
                            (2)     Yes X    No
                                       ---     ---

As of April 30, 1999, there were 15,880,098  shares of the  Registrant's  common
stock, par value $0.01 per share outstanding.

                       This document (excluding Exhibits)
                               contains 50 pages.
<PAGE>

                              SOFTNET SYSTEMS, INC.

                                    FORM 10-Q

                                      INDEX



                                                                            PAGE
                                                                            ----
PART I.   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Condensed Balance Sheets as of June 30, 1999
         and September 30, 1998................................................3

         Consolidated Condensed Statements of Operations for the
         three months and nine months ended June 30, 1999 and 1998.............4

         Consolidated Condensed Statements of Cash Flows for the
         nine months ended June 30, 1999 and 1998..............................5

         Notes to Consolidated Condensed Financial Statements..................6

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations............................................16

Item 3.  Quantitative and Qualitative Disclosures about Market Risk...........27

PART II.   OTHER INFORMATION

     Item 1.  Legal Proceedings - Not applicable

     Item 2.  Changes in Securities...........................................27

     Item 3.  Defaults upon Senior Securities - Not applicable

     Item 4.  Submission of Matters to a Vote of Security Holders.............28

     Item 5.  Other Information...............................................28

     Item 6.  Exhibits and Reports on Form 8-K................................49



<PAGE>


Part I.  Financial Information
<TABLE>
<CAPTION>

                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                      Consolidated Condensed Balance Sheets
                   As of June 30, 1999 and September 30, 1998
                        (In thousands, except share data)
                                   (Unaudited)

                                                                                         June 30,         September 30,
                                                                                           1999               1998
                                                                                      ---------------   ------------------

                                     ASSETS
<S>                                                                                       <C>                  <C>
Current assets:
   Cash and cash equivalents.....................................................         $  151,954           $   12,504
   Accounts receivable, net......................................................                828                  110
   Notes receivable..............................................................              2,956                   --
   Inventories...................................................................              1,644                  268
   Other current assets..........................................................              2,081                  571
                                                                                      ---------------   ------------------
      Total current assets.......................................................            159,463               13,453
Restricted cash..................................................................                872                  800
Property and equipment, net......................................................             16,097                5,981
Acquired technology and other intangibles, net...................................             25,627                  311
Net assets associated with discontinued operations...............................              4,795                8,930
Other assets.....................................................................              6,025                  150
                                                                                      ===============   ==================
    Total assets.................................................................         $  212,879           $   29,625
                                                                                      ===============   ==================

  LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
                                    (DEFICIT)

Current liabilities:
   Accounts payable and accrued expenses.........................................          $  10,833           $    6,938
   Deferred gain.................................................................              2,304                   --
   Current portion of capital leases.............................................              1,772                  613
   Current portion of long-term debt.............................................              3,017                  541
                                                                                      ---------------   ------------------
      Total current liabilities..................................................             17,926                8,092
Capital lease obligations, net of current portion................................              2,287                  297
Long-term debt, net of current portion...........................................             18,446                9,220
                                                                                      ---------------   ------------------
    Total liabilities............................................................             38,659               17,609
                                                                                      ---------------   ------------------
Redeemable convertible preferred stock; $0.10 par value; 37,610 shares
   designated; no shares and 20,757 shares issued and outstanding, respectively..                 --               18,187
                                                                                      ---------------   ------------------
Stockholders' equity (deficit):
   Preferred stock; $0.10 par value; 3,962,390 shares designated; no shares
      issued and outstanding.....................................................                 --                   --
   Common stock; $0.01 par value; 100,000,000 and 25,000,000 shares authorized,
      respectively; 16,840,440 and 8,191,550 shares issued and outstanding,
      respectively...............................................................                168                   82
   Additional paid-in capital....................................................            328,942               43,700
   Deferred stock compensation...................................................            (71,908)                (188)
   Accumulated deficit...........................................................            (82,982)             (49,765)
                                                                                      ---------------   ------------------
      Total stockholders' equity (deficit).......................................            174,220               (6,171)
                                                                                      ===============   ==================
      Total liabilities, redeemable convertible preferred stock and
          stockholders' equity (deficit).........................................         $  212,879           $   29,625
                                                                                      ===============   ==================
</TABLE>

                   The  accompanying   notes  are  an  integral  part  of  these
consolidated condensed financial statements.


<PAGE>
<TABLE>


                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                 Consolidated Condensed Statements of Operations
        For the Three Months and Nine Months Ended June 30, 1999 and 1998
                      (In thousands, except per share data)
                                   (Unaudited)

<CAPTION>

                                                           Three Months Ended                 Nine Months Ended
                                                                June 30,                           June 30,
                                                     -------------------------------    -------------------------------
                                                         1999              1998             1999              1998
                                                     --------------    -------------    --------------    -------------

<S>                                                      <C>               <C>              <C>               <C>
Net sales.......................................         $  1,317          $   298          $  2,788          $   764
Cost of sales...................................            1,460              335             2,758              585
                                                     --------------    -------------    --------------    -------------
    Gross profit (loss).........................              (143)             (37)              30              179
                                                     --------------    -------------    --------------    -------------

Operating expenses:
    Selling and marketing.......................            4,197              869             8,567            1,256
    Engineering.................................            1,856              172             3,325              387
    General and administrative..................            2,439            1,452             6,616            2,778
    Depreciation................................              938              130             2,140              269
    Amortization................................              872              104             1,597              311
    Compensation expense related to stock
        options.................................            5,680                --            6,721                --
                                                     --------------    -------------    --------------    -------------
        Total operating expenses................           15,982            2,727            28,966            5,001
                                                     --------------    -------------    --------------    -------------

Loss from continuing operations.................           (16,125)          (2,764)          (28,936)          (4,822)

Other income (expense):
    Interest expense............................            (2,453)            (244)           (3,580)            (676)
    Interest income.............................            1,336                32            1,576                40
    Other.......................................            (1,373)             (49)           (1,405)             (48)
                                                     --------------    -------------    --------------    -------------

Loss from continuing operations before income
    taxes                                                  (18,615)          (3,025)          (32,345)          (5,506)

Income taxes....................................               --               --                --               --
                                                     --------------    -------------    --------------    -------------

Loss from continuing operations.................           (18,615)          (3,025)          (32,345)          (5,506)

Loss from discontinued operations...............               (15)             (32)             (399)          (1,142)
                                                     --------------    -------------    --------------    -------------

Net loss........................................           (18,630)          (3,057)          (32,744)          (6,648)

Preferred dividends.............................               (59)             (85)             (473)            (148)
                                                     --------------    -------------    --------------    -------------

Net loss applicable to common shares............         $ (18,689)       $  (3,142)        $ (33,217)       $  (6,796)
                                                     ==============    =============    ==============    =============

Basic and diluted loss per share:
    Continuing operations.......................         $   (1.26)       $   (0.40)        $   (2.99)       $   (0.77)
    Discontinued operations.....................             (0.00)           (0.01)            (0.04)           (0.16)
    Preferred dividends.........................             (0.01)           (0.01)            (0.04)           (0.02)
                                                     ==============    =============    ==============    =============
    Net loss applicable to common shares........         $   (1.27)       $   (0.42)        $   (3.07)       $   (0.95)
                                                     ==============    =============    ==============    =============

Shares used to compute basic and diluted loss
    per share...................................            14,764            7,502            10,806            7,144
                                                     ==============    =============    ==============    =============
</TABLE>


                   The  accompanying   notes  are  an  integral  part  of  these
consolidated condensed financial statements.


<PAGE>

<TABLE>

                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                 Consolidated Condensed Statements of Cash Flows
                For the Nine Months Ended June 30, 1999 and 1998
                                 (In thousands)
                                   (Unaudited)
<CAPTION>

                                                                                              For the Nine Months Ended
                                                                                                      June 30,
                                                                                         ------------------------------------
                                                                                               1999                1998
                                                                                         -----------------     --------------
<S>                                                                                           <C>                 <C>
Cash flows from operating activities:
     Net loss.......................................................................          $  (32,744)         $  (6,648)

        Adjustments  to  reconcile  net  loss  to net  cash  used  in  operating
activities:
            Loss from discontinued operations.......................................                 399              1,142
            Depreciation and amortization...........................................               3,737                580
            Amortization of deferred stock compensation.............................               6,721                 --
            Amortization of deferred debt issuance costs............................               2,335                 --
            Provision for bad debts.................................................                 186                 45
            Loss on disposition of short-term investment............................                 600                 --
            Penalty paid on redeemable convertible preferred stock..................                 498                 --
            Changes in operating assets and liabilities:
                Accounts receivable.................................................                (718)              (164)
                Inventories.........................................................              (1,376)              (108)
                Other current assets................................................              (1,320)               26
                Accounts payable and accrued expenses...............................               2,088              2,062
                                                                                         -----------------     --------------
Net cash used in operating activities of continuing operations......................             (19,594)            (3,065)
                                                                                         -----------------     --------------
Net cash provided by (used in) operating activities of discontinued operations......                 842               (171)
                                                                                         -----------------     --------------

Cash flows from investing activities:
     Purchase of short-term investment..............................................                (600)                --
     Purchase of property and equipment.............................................              (7,518)            (1,929)
     Purchase of Intellicom including acquisition costs, net of cash acquired.......                (803)                --
     Sale of net assets of telecommunications segment, net of selling costs.........               2,694                 --
     Acquired technology and other intangibles......................................              (1,913)                --
     Other assets...................................................................                (777)              (106)
                                                                                         -----------------     --------------
Net cash used in investing activities of continuing operations......................              (8,917)            (2,035)
                                                                                         -----------------     --------------
Net cash used in investing activities of discontinued operations....................                 (98)              (168)
                                                                                         -----------------     --------------

Cash flows from financing activities:
     Repayment of short-term debt...................................................                (612)                --
     Proceeds from issuance of long-term debt, net of cash issuance costs...........              13,358                 --
     Repayment of long-term debt....................................................                (955)              (196)
     Borrowings under revolving credit facility.....................................              18,285              8,647
     Payments under revolving credit facility.......................................             (21,215)            (9,111)
     Additional costs of issuance of redeemable convertible preferred stock.........                (152)                --
     Net proceeds from issuance of redeemable convertible preferred stock...........                  --             14,100
     Proceeds from sale of common stock, net of selling costs.......................             156,492                 --
     Proceeds from exercise of options..............................................               2,454                553
     Proceeds from exercise of warrants.............................................               1,671              2,168
     Preferred dividends paid in cash...............................................                 (95)                --
     Additional restricted cash.....................................................                 (72)                --
     Capitalized lease obligations paid.............................................                (904)               (84)
                                                                                         -----------------     --------------
Net cash provided by financing activities of continuing operations..................             168,255             16,077
                                                                                         -----------------     --------------
Net cash used in financing activities of discontinued operations....................               (1,038)            (857)
                                                                                         -----------------     --------------

Increase in cash and cash equivalents...............................................             139,450              9,781
Cash and cash equivalents, beginning of period......................................              12,504                 37
                                                                                                               --------------
                                                                                         =================
Cash and cash equivalents, end of period............................................          $  151,954           $  9,818
                                                                                         =================     ==============
</TABLE>

                   The  accompanying   notes  are  an  integral  part  of  these
consolidated condensed financial statements.


<PAGE>


                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
              Notes to Consolidated Condensed Financial Statements

1.   Basis of Presentation

The  financial  information,  except for the balance  sheet as of September  30,
1998,  included  herein is unaudited;  however,  such  information  reflects all
adjustments  (consisting  solely of normal recurring  adjustments) which are, in
the opinion of management,  necessary for a fair  presentation  of the condensed
consolidated  statements of financial  position,  results of operations and cash
flows as of and for the interim periods ended June 30, 1999 and 1998.

The Company's  annual report on Form 10-K/A for the fiscal year ended  September
30, 1998, as filed with the Securities and Exchange  Commission,  should be read
in  conjunction  with  the   accompanying   Consolidated   Condensed   Financial
Statements.  The Consolidated  Condensed  Balance Sheet as of September 30, 1998
was derived from the Company's audited Consolidated Financial Statements.

The results of operations  for the three and nine months ended June 30, 1999 are
based in part on estimates that may be subject to year-end  adjustments  and are
not necessarily indicative of the results to be expected for the full year.

The balance sheet as of September 30, 1998 and the  statements of operations and
cash flow for the three and nine months  ended June 30, 1998 have been  restated
for  the   effects   of   discontinued   operations   (see   Note  3).   Certain
reclassifications have been made to conform with the current presentation.

2.    Cash and Cash Equivalents

Upon closing of the Secondary  Offering  (see Note 7), the Company  invested the
net proceeds in a standard interest-bearing bank account. Subsequent to June 30,
1999,  the Company began  investing the net proceeds in a variety of short-term,
highly liquid investments, with various maturity dates.

3.    Discontinued Operations

Document Management Segment

On  November  5,  1998,  we agreed  to sell our  document  management  business,
Micrographic  Technology Corporation ("MTC") to Global Information  Distribution
GmbH ("GID") for an aggregate purchase price of approximately $5.1 million.  GID
paid $100,000 as a non-refundable deposit upon acceptance of the GID term sheet.
GID will pay us the remaining  $5.0 million at the closing.  In April 1999,  the
Company's  stockholders formally approved the plan to discontinue  operations of
its document  management  segment.  Accordingly,  the  operating  results of the
document management segment have been segregated from continuing  operations and
reported as a separate line item on the statement of operations.  The assets and
liabilities of such operations have been reflected as a net asset.

Operating results of the discontinued document management segment are as follows
(in thousands):

                               Three Months Ended            Nine Months Ended
                                    June 30,                      June 30,
                           -------------------------- --------------------------
                               1999         1998         1999          1998
                           ------------  ------------ ------------  ------------

Net sales..................   $ 3,329       $ 3,223     $ 10,949       $ 9,870
Loss before income taxes...       (15)         (285)        (568)       (1,510)
Income taxes...............        --            --           --            --
Net loss...................       (15)         (285)        (568)       (1,510)



<PAGE>



Assets and liabilities of the discontinued  document  management  segment are as
follows (in thousands):

                                                       June 30,       September
                                                         1999         30, 1998
                                                      -----------    ----------

Current assets:
    Cash and cash equivalents........................    $    --      $    --
    Accounts receivable, net.........................      3,687       2,995
    Current portion of gross investment in leases....      1,077       1,579
    Inventories......................................        721       1,078
    Other current assets.............................        383         310
                                                      -----------    ---------
                                                           5,868       5,962
Gross investment in leases, net of current portion...      1,697       1,863
Property and equipment, net..........................        451         541
Goodwill, net........................................        225         644
Other assets.........................................        655         974
                                                      -----------    ---------
                                                           8,896       9,984
                                                      -----------    ---------
Current liabilities:
    Accounts payable and accrued expenses............      2,418       2,485
    Deferred revenue.................................        366         100
    Current portion of capital leases................         20          19
    Current portion of long-term debt................      1,283       1,280
                                                      -----------    ---------
                                                           4,087       3,884
Capital lease obligation, net of current portion.....         14          30
Long-term debt, net of current portion...............         --       1,015
                                                      -----------    ---------
                                                           4,101       4,929
                                                      ===========    =========
Net assets associated with discontinued operations...  $   4,795     $ 5,055
                                                      ===========    =========

Telecommunications Segment

In July 1998,  the Company's  Board of Directors  adopted a plan to  discontinue
operations  of its  telecommunications  segment.  This  segment  consists of the
Company's  wholly-owned  subsidiary Kansas  Communications,  Inc. ("KCI"), along
with KCI's Milwaukee  operations  purchased from Executone  Management  Systems,
Inc. Accordingly,  the operating results of the telecommunications  segment have
been segregated from continuing  operations and reported as a separate line item
on the statement of operations.  The assets and  liabilities of such  operations
were reflected as a net asset as of September 30, 1998.

On  February  12,  1999,  substantially  all of the  assets  of KCI were sold to
Convergent  Communications  Services, Inc. ("Convergent  Communications") for an
aggregate  purchase price of approximately $6.3 million subject to adjustment in
certain events. Convergent Communications paid $100,000 in cash in November 1998
upon execution of the letter of intent to purchase and paid the remainder of the
purchase  price on the closing date as follows:  (i) $1.4 million in cash;  (ii)
approximately 30,000 shares of Convergent  Communications' parent company common
stock with an agreed  value of  approximately  $300,000  ($10.00 per share) (the
"Convergent  Shares");  (iii) a  promissory  note in the amount of $2.0  million
which is payable on July 1, 1999 and bears  simple  interest  at the rate of 11%
per annum (the "First Convergent Note"); (iv) a promissory note in the amount of
$1.0  million  which is  payable  on the date  that is 12 months  following  the
closing date and bears simple  interest at the rate of 8% per annum (the "Second
Convergent  Note"); and (v) a promissory note in an amount of $1.5 million which
is payable on the date which is 12 months  following  the closing date and bears
simple  interest  at the  rate  of 8% per  annum  and is  subject  to  mandatory
prepayment  in certain  events (the "Third  Convergent  Note").  Furthermore,  a
purchase  price  adjustment  subsequent  to closing  provided  the Company  with
additional  Convergent  Shares  with an  agreed  value of  $198,000  for a total
investment in Convergent Shares of $498,000, which is classified as other assets
on the  accompanying  consolidated  condensed  balance sheet.  The sale of KCI's
assets  resulted in a gain of $2.3 million,  which is being  deferred  until the
Company has collected the $4.5 million of notes receivable  issued in connection
with this sale. On April 6, 1999, Convergent Communications paid $1.5 million of
the First  Convergent  Note. In July 1999, the Third Convergent Note was paid in
full, as well as the remaining amount due on the First Convergent Note.


<PAGE>


Operating results of the discontinued  telecommunications segment are as follows
(in thousands):

                                 Three Months Ended          Nine Months Ended
                                     June 30, (1)               June 30, (1)
                                ------------------------ -----------------------
                                    1999         1998       1999         1998
                                ------------  ---------- -----------  ----------

Net sales......................       $ --       $ 4,425    $ 4,730     $ 12,817
Income before income taxes.....         --           253        216          368
Income taxes...................         --            --        (73)         --
Net income.....................         --           253        169          368
------------------------

     (1) Operating results for KCI are only through the date of disposition.

Assets and liabilities of the  discontinued  telecommunications  segment were as
follows (in thousands):

                                                                  September 30,
                                                                       1998
                                                                 ---------------

Current assets:
    Cash and cash equivalents...........................                $     --
    Accounts receivable, net............................                   1,734
    Inventories.........................................                   2,248
    Other current assets................................                      36
                                                                 ---------------
                                                                           4,018
Property and equipment, net.............................                     427
Goodwill, net...........................................                   1,663
Other assets............................................                      21
                                                                 ---------------
                                                                           6,129
                                                                 ---------------
Current liabilities:
    Accounts payable and accrued expenses...............                   1,582
    Current portion of capital leases...................                      32
    Deferred revenue....................................                     593
                                                                 ---------------
                                                                           2,207
Capital lease obligation, net of current portion........                      47
                                                                 ---------------
                                                                           2,254
                                                                 ---------------
Net assets associated with discontinued operations......               $   3,875
                                                                 ===============

4.    Acquisition of Intellicom

On February 9, 1999, a  wholly-owned  subsidiary of the Company  merged with and
into   Intelligent   Communications,   Inc.   ("Intellicom",   the   "Intellicom
Acquisition").  Intellicom is a provider of two-way  satellite  Internet  access
options using very small aperture  terminal  technology  ("VSAT").  The purchase
price of $14.5 million was  comprised of: (i) a cash  component of $500,000 (the
"Cash  Consideration");  (ii) a  promissory  note in the amount of $1.0  million
bearing  interest at 7.5% per annum and due one year after  closing  (the "First
Promissory Note"); (iii) a promissory note in the amount of $2.0 million bearing
interest  at 8.5%  per  annum  and due two  years  after  closing  (the  "Second
Promissory   Note",   together  with  the  First   Promissory  Note,  the  "Debt
Consideration");  (iv) the issuance of 500,000  shares of the  Company's  common
stock (adjustable  upwards after one year in certain  circumstances),  valued at
$14.938 per share, for a total value of $7.5 million (the "Closing Shares"); and
(v)  additional  shares of the Company's  common stock  issuable upon the first,
second and third anniversaries of the closing, valued at a total of $3.5 million
(the  "Anniversary  Shares",  together  with the  Closing  Shares,  the  "Equity
Consideration").  In addition,  a demonstration bonus of $1.0 million payable in
cash or shares of the Company's  common stock at the Company's option within one
year after closing if certain  conditions are met is also a part of the purchase
price;  however,  due to the  uncertainty as to whether or not such  performance
criteria  will  be  met,  the  Company  has  not  accrued  for  such  contingent
consideration.  To the extent such conditions are met, the payment will increase
intangible assets associated with acquired technology.


<PAGE>

The purchase price,  including direct merger costs, has been allocated to assets
acquired  and  liabilities  assumed  based on fair  market  value at the date of
acquisition.  The fair value of assets and liabilities  assumed is summarized as
follows (in thousands):

Current assets..........................................$     503
Property and equipment..................................      684
Acquired technology.....................................   16,075
Other assets............................................       77
Current liabilities.....................................    2,470

The Company  accounted for the Intellicom  Acquisition using the purchase method
and allocated the entire purchase price of $14.5 million to acquired technology.
Additionally,  due to the negative  fair value of  Intellicom  net assets at the
time of acquisition,  the Company recognized  additional  acquired technology in
Intellicom totaling $1.2 million. Furthermore, in connection with the Intellicom
Acquisition,  the Company incurred certain fees and expenses.  Such costs, which
total  $400,000,  were  capitalized  and have also been  allocated  to  acquired
technology,  bringing the total amount allocated to acquired technology to $16.1
million.   The  results  of  operations  of  Intellicom   are  included  in  the
accompanying financial statements from the date of acquisition.

The nature of the  developed  technology  acquired  provides  the Company with a
proprietary  satellite  system,  involving  both  hardware and  software,  which
provides a high-performance,  two-way  satellite-based  Internet access service.
The nature of the  acquired  technology  will,  among  other  things,  allow the
Company to lower the costs of bringing the  Internet to small- and  medium-sized
independent cable operators. The technology acquired has already been tested and
proven  to be a  viable  business.  Therefore,  the  Company  believes  that the
underlying  technology acquired in the Intellicom  Acquisition is not subject to
rapid change,  and such acquired  technology will support the Company's business
plan over the typical length of its contracts  without  having to  significantly
change or enhance the acquired  technology.  The  Company's  contracts  with its
cable  affiliates  typically run from five to ten years. In determining how much
of the purchase  price in excess of the  tangible  book value of  Intellicom  to
allocate to acquired  technology,  the Company  considered that there was little
value  ascribable  to  other  intangible  assets,  such  as  customer  lists  or
workforce. Rather, the Company, after careful consideration, determined that the
fair market value of the acquired  technology is  equivalent  to the  intangible
assets acquired in this acquisition.  The Company, therefore, will be amortizing
this amount by the straightline method over a period of seven years, the average
term of a typical cable  affiliate  contract as well as the  anticipated  useful
life of this acquired technology.

The  following   unaudited  pro  forma   financial   information   presents  the
consolidated  results  of the  Company  as if  the  Intellicom  Acquisition  had
occurred as of October 1, 1997, and includes  adjustments  for  amortization  of
acquired technology and interest expense related to the Debt Consideration. This
pro forma  financial  information  does not  necessarily  reflect the results of
operations  as they would have been if the Company had  acquired the entities as
of October 1, 1997.  Unaudited pro forma consolidated  results of operations are
as follows (in thousands, except per share data):

                                    Three Months Ended         Nine Months Ended
                                         June 30,                  June 30,
                                  ------------------------  --------------------
                                    1999          1998       1999        1998
                                  ----------   ----------  ---------   --------

Net sales......................... $ 1,317       $  846     $ 3,602     $ 2,690
Net loss applicable to common
    shares.......................  (18,689)      (3,999)    (35,719)     (8,949)
Basic and diluted net loss
    applicable to common shares...   (1.27)       (0.53)      (3.31)      (1.25)

In April 1999, the Company paid the First  Promissory Note and related  interest
in full with a combination of cash and equity. The Company paid $634,000 in cash
and the  remainder  with  11,725  shares of common  stock,  which had a value of
$388,000.


<PAGE>



5.    Acquired Technology and Other Intangibles

Acquired   technology  and  other  intangibles  consist  of  the  following  (in
thousands):

                                            June 30,         September 30,
                                              1999                1998
                                        ----------------    ------------------

 Acquired technology..................      $  16,075              $     --
 Cable affiliate launch incentives....         11,088                    --
 Goodwill.............................             --                 1,244
                                        ----------------    ------------------
                                               27,163                 1,244
 Accumulated amortization.............         (1,536)                 (933)
                                        ================    ==================
                                            $  25,627              $    311
                                        ================    ==================

In July 1998, the Company  adopted its Cable  Affiliate  Incentive  Program (the
"Program"). This Program provides an additional incentive to the Company's cable
affiliates to launch the Company's ISP Channel,  Inc. ("ISP  Channel")  Internet
services.  Under the Program,  the Company offers to pay incentive  bonuses,  in
cash or shares of common stock,  to qualifying  cable  affiliates who enter into
exclusive, multiple-year contracts with ISP Channel. These launch incentives are
paid out over  the life of the  contract  in  relation  to the  roll-out  of ISP
Channel  services at each installed  cable  head-end.  In accordance  with these
terms,  the Company  capitalizes  these cable  affiliate  launch  incentives and
amortizes them over the life of each respective contract,  typically five to ten
years.

On March 24, 1999, the Company  entered into an agreement  with Teleponce  Cable
TV, ("Teleponce",  the "Teleponce Agreement"),  a cable operator in Puerto Rico,
in which the Company would issue  660,000  shares of common stock to an investor
in  exchange  for $15.0  million  in cash and a  modification  of the  affiliate
agreement  between  the  Company  and  Teleponce,  which is  controlled  by that
investor. During the quarter, the Company issued these shares, and recognized an
intangible  asset, a cable  affiliate  launch  incentive,  in the amount of $8.9
million.  This  intangible  asset  represents the difference  between the market
value per common share as of the date the  Teleponce  Agreement was entered into
and the cash consideration provided in the Teleponce Agreement.

During the quarter ended June 30, 1999, goodwill became  fully-amortized.

6.    Long-Term Debt and Debt Issuance Costs

On January 12, 1999, the Company  executed an agreement  with two  institutional
investors  whereby  the  Company  issued  $12.0  million in senior  subordinated
convertible notes (the "Notes"). Such Notes bear an interest rate of 9% per year
and mature in 2001.  These Notes are convertible into the Company's common stock
with an initial  conversion  price of $17.00  per share  until July 1, 1999 and,
thereafter,  at the lower of $17.00 per share (the "Initial  Conversion  Price")
and the lowest five-day  average closing bid price of the Company's common stock
during  the  30-day  trading  period  ending  one day  prior  to the  applicable
conversion  date (the  "Conversion  Price").  Upon  issuance  of the Notes,  the
Company's  market  price of its common  stock  exceeded  the  Conversion  Price,
thereby  creating  a  beneficial   conversion   feature  (the  "Note  Conversion
Benefit").  Thus, the Company has recorded  additional  interest expense of $1.2
million,  representing the value of the Note Conversion  Benefit.  In connection
with these Notes, the Company issued to these investors  warrants to purchase an
aggregate of 300,000 shares of the Company's  common stock.  These warrants have
an  exercise  price of $17.00  per share and  expire in 2003.  The fair value of
these  warrants of $4.3 million is treated  as issuance  costs of the Notes (see
below).

In April  1999,  as a result of the  Secondary  Offering  (see  Note 7),  and in
conjunction  with an  anti-dilution  provision  associated  with the Notes,  the
Initial   Conversion  Price  was  reduced  from  $17.00  to  $16.49  per  share.
Furthermore,  in order to secure three month lock-up agreements from the holders
of the Notes in conjunction with the Company's  Secondary Offering (see Note 6),
the  Company  entered  into a new  arrangement  with the holders of the Notes to
issue all future interest  payments,  beginning with the third fiscal quarter of
1999,  in the form of  convertible  notes with  substantially  the same form and
features as the original Notes. Therefore,  the Company has issued an additional
$270,000 in notes,  representing  interest for the quarter,  as of June 30, 1999
(the "Interest Notes").  The issuance of these Interest Notes also resulted in a
Note Conversion  Benefit. As a result, an additional $173,000 will be recognized
as additional interest expense due to this additional Note Conversion Benefit.
<PAGE>

The  costs  related  to  the  issuance  of the  Notes  and  other  miscellaneous
financings,  including the value of the warrants  issued in connection  with the
Notes and other financings, were capitalized and are being amortized to interest
expense using the  effective  interest  method over the life of the debt.  These
debt issuance costs are presented as other assets, net of amortization,  of $3.5
million on the accompanying  consolidated condensed balance sheet as of June 30,
1999.

In February 1999, the Company issued the $2.0 million Second  Promissory Note in
conjunction with the Intellicom Acquisition (see Note 4).

On February 5, 1999, a single holder of the Company's 9% convertible  debentures
due 2000 converted a debenture in the face amount of $402,000 into 59,483 shares
of the Company's  common stock.  These 9% debentures have a conversion  price of
$6.75  per  share  of  common  stock.  In  April  1999,  additional  convertible
subordinated notes,  having an aggregate face amount of $86,000,  were converted
into  11,268  shares  of  the  Company's  common  stock.  These  debentures  had
conversion prices ranging from $6.75 and $8.10 per share of common stock.

Long-term debt is summarized as follows (in thousands):

                                              June 30,         September 30,
                                                1999                1998
                                          ----------------    ------------------

Revolving credit facility................      $   2,167           $    5,120
Senior subordinated convertible notes....         12,270                   --
Convertible subordinated notes...........          3,463                3,951
Promissory note..........................          2,000                   --
Other....................................          1,563                  690
                                          ----------------    ------------------
                                                  21,463                9,761
Less current portion.....................         (3,017)                (541)
                                          ----------------
                                                              ==================
                                               $  18,446            $   9,220
                                          ================    ==================

7.    Redeemable Convertible Preferred Stock and Common Stock

Redeemable Convertible Preferred Stock

In November  1998,  the Company  issued an aggregate of 413,018 shares of common
stock  pursuant  to the  conversion  of the  remaining  3,100.78  shares  of the
Company's  outstanding  Series A redeemable  convertible  preferred  stock.  The
Series A redeemable  convertible  preferred stock,  including accrued dividends,
was converted into common shares at the conversion price of $7.56 per share.

In February  1999,  the Company  issued an aggregate of 782,352 shares of common
stock  pursuant  to the  conversion  of the  10,251.56  shares of the  Company's
outstanding  Series B  redeemable  convertible  preferred  stock.  The  Series B
redeemable  convertible  preferred  stock,  including  accrued  dividends,   was
converted into common shares at the conversion price of $13.20 per share.

In May 1999,  the Company  issued an aggregate of 853,770 shares of common stock
pursuant to the conversion of the 7,625.39  shares of the Company's  outstanding
Series C redeemable  convertible  preferred stock,  representing the last of the
Company's  redeemable  convertible  preferred  stock.  The  Series C  redeemable
convertible  preferred stock,  including accrued  dividends,  was converted into
common  shares at the  conversion  price of $9.00 per share.  In  addition,  the
Company  incurred  a penalty  of  $498,000,  presented  as other  expense on the
accompanying  consolidated  condensed statements of operations for the three and
nine  months  ended  June 30,  1999,  as a result of a delay in its  ability  to
register the  underlying  common  stock of the Series C  redeemable  convertible
preferred  stock with the Securities and Exchange  Commission.  This penalty was
paid to the  holders  of the Series C  redeemable  convertible  preferred  stock
through the issuance of an additional 55,378 shares of common stock.


<PAGE>



Dividends

During the quarter ended December 31, 1998,  the Company  declared a dividend on
both its  outstanding  Series B redeemable  convertible  preferred stock and its
outstanding Series C redeemable convertible preferred stock, payable on December
31, 1998 to the  respective  stockholders  of record at the close of business on
December 28, 1998. Dividends for the Series B redeemable  convertible  preferred
stock, payable at an annual rate of 5%, were paid at the Company's option in the
form  of  126.56   additional  shares  of  the  Company's  Series  B  redeemable
convertible preferred stock.  Dividends for the Series C redeemable  convertible
preferred  stock,  payable at an annual rate of 5%,  were paid at the  Company's
option  in the  form of  94.14  additional  shares  of the  Company's  Series  C
redeemable  convertible  preferred  stock. In addition,  the Company accrued for
dividends on its Series A redeemable  convertible  preferred  stock  through the
date of  conversion  at an annual rate of 5%.  Dividends  for the quarter  ended
December 31, 1998, were valued at $243,000.

During the quarter ended March 31, 1999, the Company  declared a dividend on its
outstanding Series C redeemable  convertible  preferred stock,  payable on March
31, 1999 to the  respective  stockholders  of record at the close of business on
March 26,  1999.  Dividends  for the Series C redeemable  convertible  preferred
stock,  payable at an annual  rate of 5%, were paid at the  Company's  option in
cash. In addition,  the Company accrued for dividends on its Series B redeemable
convertible  preferred stock through the date of conversion at an annual rate of
5%. Dividends for the quarter ended March 31, 1999, were valued at $171,000.

During the quarter ended June 30, 1999, the Company accrued for dividends on its
Series C redeemable  convertible  preferred stock through the date of conversion
at an annual rate of 5%.  Dividends  for the quarter  ended June 30, 1999,  were
valued at $59,000.

Common Stock

In February  1999,  the Company  entered into a license  agreement  with Inktomi
Corporation ("Inktomi",  the "Inktomi Licensing Agreement") allowing the Company
rights to install certain  Inktomi  caching  technology into the Company's cable
and satellite network infrastructure.  The Inktomi Licensing Agreement is valued
at $4.0 million for a total of 500 licenses, of which the first $1.0 million was
paid with 65,843 shares of the Company's  common stock and the remaining  amount
is payable in cash in eight subsequent  quarterly payments of $375,000 ($750,000
having been paid through June 30, 1999). The Inktomi Licensing  Agreement allows
the  Company to  purchase up to 500  additional  licenses  during the first four
years of the  agreement.  The first licenses are expected to be installed in the
fourth quarter of fiscal 1999.  These prepaid  license fees of $1.75 million are
presented as other assets on the  accompanying  consolidated  condensed  balance
sheet as of June 30, 1999.

On April 12,  1999,  the Company  issued  660,000  shares of common  stock to an
investor  in  exchange  for  $15.0  million  in cash and a  modification  of the
affiliate agreement between the Company and Teleponce (see Note 4).

On April 13,  1999,  the  Company  held its annual  stockholders'  meeting  (the
"Annual Stockholders' Meeting"). At this meeting, the following proposals, among
others, were approved: (i) an increase in the number of common shares authorized
was increased  from  25,000,000 to  100,000,000;  (ii) the Company's  1998 Stock
Incentive  Plan (the "1998 Plan") under which  3,350,668  shares of common stock
were reserved for issuance;  (iii) the sale of the Company's document management
segment (see Note 2); and (iv) the Company's reincorporation in Delaware.

On April 28,  1999,  the  Company  completed a secondary  public  offering  (the
"Secondary  Offering"),  in which it sold  4,600,000  shares of common  stock at
$33.00  per  share.  The  Company  received  $142.0  million  in  cash,  net  of
underwriting discounts, commissions and other offering costs.


<PAGE>



8.    Stock Options and Warrants

The following table summarizes the outstanding  options and warrants to purchase
shares of common stock for the nine months ended June 30, 1999:
<TABLE>
<CAPTION>

                                                                                             Outstanding
                               Outstanding options          Outstanding warrants         options and warrants
                            ---------------------------    ------------------------    ------------------------
                                           Weighted                      Weighted                    Weighted
                                           average                       average                     average
                                           exercise                      exercise                    exercise
                             Shares          price         Shares         price         Shares        price
                            -----------    ------------    ---------     ----------    ----------    ----------
<S>                         <C>                 <C>        <C>              <C>        <C>                <C>
Outstanding as of
   September 30, 1998...    1,370,125           $7.42      832,399          $9.27      2,202,524          $8.12

Granted.................    2,175,550          $15.48      303,013         $17.13      2,478,563         $15.68
Exercised...............     (387,445)          $6.33      (254,207)        $7.62      (641,652)          $6.84
Canceled................      (84,219)         $11.62       (28,142)       $10.12      (112,361)         $11.24
                            -----------                    ---------                   ----------

Outstanding as of
   June 30, 1999......      3,074,011          $13.16      853,063         $12.52      3,927,074         $13.02
                            ===========                    =========                   ==========
</TABLE>

In April 1999, the Company adopted the 1998 Plan and reserved  3,350,668  shares
for issuance thereunder.  The 1998 Plan provides for the grants of non-qualified
and incentive stock option grants to officers,  employees and other individuals.
Under the terms of the 1998 Plan,  options have a maximum term of ten years from
the date of grant. The granted options have various vesting  criteria  depending
on the grantee; however, most grants having a vesting period of four years.

During the period  from  October  1998 to April  1999,  the  Company  granted to
certain  employees,  pending  stockholder  approval,  an  aggregate of 1,618,550
incentive and non-qualified  common stock options at a weighted average exercise
price of $12.74 per share, net of employee  terminations.  Primarily as a result
of the adoption of the 1998 Plan (see Note 6), and in accordance with Accounting
Principles Board Opinion No. 25,  Accounting for Stock Issued to Employees,  the
Company will recognize a non-cash compensatory charge over the remaining vesting
period on a straightline basis totaling  approximately $76.6 million relating to
the issuance of these stock  options.  Although all of the options  issued under
the 1998  Plan  were  granted  at what was  then  the fair  market  value of the
Company's  common  stock on the date of grant,  the  Company  must  recognize  a
non-cash compensation charge for the difference between the various grant prices
and  $59.875,  the closing  price of the  Company's  common stock on the date of
stockholder approval of the plan.  Accordingly,  the Company will record a total
charge of  approximately  $76.6  million,  which will be amortized as a non-cash
compensation expense over the remaining vesting period of such stock options. As
a result, the Company recognized $5.4 million as compensation expense related to
stock options for the quarter ended June 30, 1999 for employee stock options.

In addition to employee stock options,  the Company has granted stock options to
certain  non-employees.  In accordance  with  Statement of Financial  Accounting
Standards  No.  123,  Accounting  for  Stock-Based  Compensation,   the  Company
recognizes  deferred  compensation  charges with  respect to the 118,000  option
shares it has issued to certain consultants. These deferred compensation charges
are being  amortized,  on an  accelerated  basis,  in accordance  with Financial
Accounting   Standards  Board   Interpretation  No.  28,  Accounting  for  Stock
Appreciation  Rights and Other  Variable  Stock Option or Award Plans,  over the
vesting  period of such options.  The Company has  recognized  $331,000 of these
charges  for the  quarter  ended June 30,  1999 and has  $706,000  remaining  as
deferred compensation related to these non-employee options as of June 30, 1999.

<PAGE>
9. Segment Information

The Company  operates  principally  in two business  segments:  (i)  cable-based
Internet  services through its wholly-owned  subsidiary,  ISP Channel,  and (ii)
satellite-based   Internet   services  through  its   wholly-owned   subsidiary,
Intellicom.  The  Company  previously  reported  two  other  business  segments:
document management and telecommunications.  However, these two segments are now
reported  as  discontinued  operations  (see Note 3).  Segment  information  for
continuing operations is as follows (in thousands):
<TABLE>
<CAPTION>

                                                         Three Months Ended               Nine Months Ended
                                                              June 30,                         June 30,
                                                     ----------------------------    ----------------------------
                                                         1999           1998            1999            1998
                                                     ------------    ------------    ------------    ------------
<S>                                                     <C>             <C>             <C>            <C>
Net sales:
    Subscriber fees........................               $   295         $   88          $  678          $  193
    Modem fees and other...................                   196             17             459              32
    Dial-up fees...........................                   230            193             577             539
                                                     ------------    ------------    ------------    ------------
       ISP Channel.........................                   721            298           1,714             764
    Intellicom.............................                   596             --           1,074              --
                                                     ============    ============    ============    ============
                                                         $  1,317         $  298         $ 2,788          $  764
                                                     ============    ============    ============    ============
Operating expenses:
    Sales and marketing....................              $  3,979         $  869         $ 8,304         $ 1,256
    Engineering............................                 1,697            172           3,162             387
    General and administrative.............                 2,007            695           5,785           1,149
                                                     ------------    ------------    ------------    ------------
       ISP Channel.........................                 7,683          1,736          17,251           2,792
    Intellicom.............................                  714              --           1,059              --
    Corporate..............................                   95             757             198           1,629
    Compensation expense related to stock
       options.............................                 5,680             --           6,721              --
    Depreciation and amortization..........                 1,810            234           3,737             580
                                                     ============    ============    ============    ============
                                                         $ 15,982        $ 2,727        $ 28,966         $ 5,001
                                                     ============    ============    ============    ============
Loss from continuing operations:
    ISP Channel............................             $ (9,186)       $ (1,986)       $(20,248)      $ (3,130)
    Intellicom.............................               (1,164)              --         (1,769)             --
    Corporate..............................               (5,775)           (778)         (6,919)        (1,692)
                                                     ============    ============    ============    ============
                                                        $(16,125)       $ (2,764)       $(28,936)      $ (4,822)
                                                     ============    ============    ============    ============
</TABLE>

<PAGE>

10.  Supplemental Cash Flow Information

The following is  supplemental  cash flow  information for the nine months ended
June 30 (in thousands):

                                                                 1999     1998
                                                               --------  -------
Cash paid during the period for:
   Interest.................................................. $  1,189    $  717

Supplemental non-cash transactions:
   Acquisition of Intellicom-Equity Consideration............ $ 10,819    $   --
   Acquisition of Intellicom-Debt Consideration..............    3,000        --
   Acquisition of Intellicom-debt acquired...................      600        --
   Notes receivable received in connection with
      disposal of telecommunications segment.................    4,500        --
   Shares of purchaser received in connection with
      disposal of telecommunications segment.................      498        --
   Common stock issued for the conversion of
      redeemable convertible preferred stock.................   18,254     2,000
   Common stock issued for the conversion of
      subordinated notes.....................................      488     1,046
   Convertible debt issued for acquisition of
      equipment leases.......................................       --     1,444
   Value assigned to common stock warrants issued
      upon the issuance of long-term debt....................    4,334        --
   Value assigned to common stock warrants issued
      upon the issuance of redeemable convertible
      preferred stock........................................       --       435
   Value assigned to common stock issued in
      connection with cable affiliate launch incentives .....    8,925        --
   Value assigned to conversion feature of new debt..........    1,408        --
   Repayment of short-term debt with common stock............      388        --
   Equipment acquired by capital lease.......................    4,053       326
   Prepaid license fees paid with issuance of common stock...    1,000        --
   Deferred compensation associated with the
      issuance of common stock options.......................   78,441        --
   Preferred dividends paid with the issuance of
      additional redeemable convertible preferred stock......      221        62
   Preferred dividends paid with the issuance of common stock      157         6

11.   Subsequent Events

On July 7, 1999,  the Company and Mediacom LLC  ("Mediacom"),  a cable  operator
based in New York,  announced  an exclusive  agreement  to deploy the  Company's
Internet services throughout Medicacom's cable properties. Subject to completion
of final documents, the agreement is for ten years, with a minimum of five years
guaranteed.  As compensation for Mediacom's upgrade costs,  rollout  commitments
and for the  exclusive  long-term  rights  to  deliver  the  Company's  Internet
services to Mediacom's customers, the Company will issue to Mediacom 3.5 million
shares of common stock,  the value of which will be capitalized as an additional
intangible asset, a cable affiliate launch incentive.



<PAGE>


Item  2.    Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations

General

This  Form 10-Q  contains  forward-looking  statements  that  involve  risks and
uncertainties.  The actual results of SoftNet Systems, Inc. and its subsidiaries
could differ significantly from those set forth herein. Factors that could cause
or  contribute  to such  differences  include,  but are not  limited  to,  those
discussed in "Factors Affecting the Company's Operating Results" as set forth in
the  Company's  annual  report on Form 10-K/A for the year ended  September  30,
1998, as filed with the Securities and Exchange  Commission,  and  "Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations"  as
well as those discussed elsewhere in this quarterly report. Statements contained
herein that are not historical  facts are  forward-looking  statements  that are
subject to the safe harbor created by the Private  Securities  Litigation Reform
Act of 1995. Words such as "believes",  "anticipates",  "expects", "intends" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying  such  statements.  A number of important
factors  could  cause our actual  results  for fiscal  1999 and beyond to differ
materially  from  past  results  and  those  expressed  in  any  forward-looking
statements  made by us, or on our behalf.  We undertake no obligation to release
publicly the results of any revisions to these  forward-looking  statements that
may be made to  reflect  events or  circumstances  after  the date  hereof or to
reflect the occurrence of unanticipated events.

The following  discussion  of our financial  condition and results of operations
should  be read  in  conjunction  with,  and is  qualified  in its  entirety  by
reference  to, our  Consolidated  Financial  Statements  and the  related  Notes
thereto  appearing  in our  annual  report  on Form  10-K/A  for the year  ended
September 30, 1998, as filed with the Securities and Exchange Commission and our
Consolidated  Condensed Financial Statements and related Notes thereto appearing
elsewhere in this  quarterly  report.  Our fiscal year ends September 30 and the
first quarter of the fiscal year ends  December 31.  "Fiscal 1999" refers to the
twelve months ending September 30, 1999 with similar  references to other twelve
month periods ending September 30.

Overview

During fiscal 1998, we made a strategic  decision to focus on becoming,  through
our wholly-owned subsidiary, ISP Channel, (which was formerly known as MediaCity
World, Inc.), the dominant  cable-based  provider of high-speed Internet access,
as well as of other digital communications  services, to homes and businesses in
the franchise areas of certain small- and medium-sized cable systems. As part of
this new focus, on February 9, 1999 we completed the purchase of Intellicom, the
former Xerox Skyway  Network.  We believe that  integrating  this new technology
into our existing  business plan will allow us to cost  effectively  provide our
ISP  Channel  service to  smaller  systems  in more  remote  areas as well as to
certain other markets including  apartment  buildings,  hotels,  hospitals,  and
schools,  thereby  decreasing  our cost  structure and  increasing our potential
market size.  Also in line with this  strategy,  we determined in 1998 to divest
our two other  businesses:  MTC, a  wholly-owned  subsidiary  offering  document
management solutions, and KCI, a wholly-owned subsidiary which sold and serviced
telephone  systems,  third  party  computer  hardware  and  application-oriented
peripheral products.  On February 12, 1999, we completed the divestiture of KCI.
In  addition,  on November 5, 1998,  we entered  into a letter of intent for the
sale of MTC,  which we  modified  in March 1999.  Since July 27,  1998,  we have
reclassified and reported KCI in discontinued operations.  On April 13, 1999, we
obtained  stockholder  approval to divest MTC and therefore are now treating MTC
as a  discontinued  operation.  We have  accordingly  restated the  Consolidated
Condensed Financial  Statements appearing elsewhere in this quarterly report. On
April 28, 1999, we received $142.0 million in net proceeds from the underwritten
public sale of 4,600,000 shares of our common stock (the "Secondary Offering").

We began providing Internet services following our acquisition of ISP Channel in
June 1996.  While we continue to offer the traditional  dial-up  Internet access
business  acquired at, and built up since that time, our primary objective is to
become the  dominant  provider of  high-speed  Internet  access via the existing
cable television  infrastructure  to homes and businesses in the franchise areas
of small-  and  medium-sized  cable  television  systems.  We seek to enter into
exclusive multi-year agreements with cable affiliates that permit ISP Channel to
provide  high-speed  Internet  access and other services to homes and businesses
served by these cable systems  through cable modems and, in the future,  through
television set-top boxes.

On February 9, 1999, we completed the purchase of  Intellicom.  Through use of a
proprietary satellite system that utilizes VSAT technology, Intellicom currently
provides  two-way  Internet  connectivity  to local Internet  service  providers
("ISPs"),  school systems and businesses,  primarily located in remote and rural
areas. Intellicom's VSAT network provides coverage and thus allows connectivity,
throughout the 48 lower states as well as in southern  Canada,  southern Alaska,
Puerto Rico, Latin America and the Caribbean.  Intellicom offers a wide range of
Internet  services  based  on its  proprietary  service  called  T1  Plus,  that
presently offers users up to 2 Mbps data transfer rates.

<PAGE>

Additionally,  while  Intellicom  will  continue  to market its  services to its
current market business,  Intellicom also provides ISP Channel with the in-house
ability to bypass  many of the high cost  terrestrial  telephone  links that ISP
Channel has  historically  used to connect the cable head-ends of its affiliated
cable operators to its own network operations center. As of July 31, 1999, there
were 11 VSATs  installed at ISP Channel's 43 operational  head-ends.  We believe
that integrating this new technology into our existing  business plan will allow
us to cost  effectively  provide our ISP Channel  service to smaller  systems in
more  remote  areas as well as to  certain  other  markets  including  apartment
buildings, hotels, hospitals, and schools, thereby decreasing our cost structure
and increasing our potential market size.

ISP Channel  Affiliates.  As of July 31,  1999,  ISP Channel had  contracts  for
service  with 42  cable  operators  representing  over  170  cable  systems  and
approximately  1.79  million  homes  passed.  A total  of 43 of  these  systems,
representing  approximately  467,000 homes  passed,  have been equipped and have
begun  offering our  services.  As of July 31, 1999,  the Company had over 4,700
residential  and business  subscribers  on its ISP Channel  service.  On July 7,
1999,  we  announced  an  exclusive  ten-year  agreement  to deploy ISP  Channel
services throughout Mediacom's cable properties.  Mediacom is one of the top ten
independent  cable  operators in the country whose systems,  upon  completion of
certain acquisitions, will pass over one million homes.

In order to further expand our cable-based Internet subscriber base, we continue
to aggressively  pursue affiliation  agreements with other cable operators under
which we obtain the exclusive right to market  cable-based  Internet services to
existing cable  television  subscribers  in such cable  operators'  systems.  We
anticipate  that this  policy of rapid  deployment  will  result in  substantial
capital expenditures,  operating losses and negative cash flow in the near term.
While we believe that we currently have  sufficient  cash and financing  sources
available to fund our  operations  through the year 2000,  we cannot assure you,
however,  that we will be able to  access  additional  capital  to  finance  our
strategy in the longer term or to  implement  our  strategy or achieve  positive
cash flow or profitability in a timely fashion, or at all.

ISP Channel Revenue Sources. In providing Internet services,  we receive revenue
from the provision of (i) cable  modem-based  Internet  access services and (ii)
traditional  dial-up  Internet  access  services.  Currently,  we or, in certain
cases,  our local  cable  affiliate,  typically  charge  new  cable  modem-based
Internet access subscribers a one-time connection fee of $99, which fee includes
modem installation but excludes any required  modification of the existing cable
television  connection which is usually  performed by the local cable affiliate.
Thereafter, each subscriber pays a monthly access fee, which is currently as low
as $29.95 per month,  and it is our  expectation  that such rates will  decrease
over  time.  We  currently  purchase  a  majority  of the cable  modems  used by
subscribers,  who are charged a nominal lease or rental  charge.  We anticipate,
however,  that the  percentage  of  customers  purchasing  their own modems will
increase as modem prices continue to decrease and  standardization  becomes more
prevalent.  We do not charge new dial-up subscribers a connection fee, but we do
charge them a monthly access fee of approximately $20.

For our cable-based  Internet services,  we typically give 25% of monthly access
revenues to cable  affiliates  for the first 200  subscribers in each system and
50% thereafter. For other services, such as Internet-based telephony, e-commerce
and advertising,  we expect to give between 25% and 50% of these revenues to the
cable affiliates.  We report these revenues net of the percentage we give to our
cable  affiliates.  We expect to retain all  revenue  from cable modem lease and
rental income.  Depending on competitive  market  conditions,  these pricing and
revenue sharing parameters could change over time.

In addition to  connection  fees and monthly  access  fees,  we intend to pursue
additional  revenue  opportunities  from Internet  advertising,  e-commerce  and
Internet-based  telephony.  We also  intend to pursue  long  distance  telephone
services and telephony debit and credit cards.

In the future, as digital set-top boxes become available and are introduced into
our affiliated  cable  systems,  we expect to charge those  subscribers  monthly
access fees comparable to those now charged to traditional dial-up  subscribers.
We also  expect to charge  customers  a set-top  connection  fee to help  defray
installation expenses.

<PAGE>

Intellicom  Revenue  Sources.  Intellicom  provides  a  comprehensive  range  of
products and services,  supported by a stable,  low-cost  VSAT system,  based on
two-way satellite technology,  that are primarily intended to provide high-speed
access to the Internet.  Connectivity  services are provided  through a range of
VSAT options for customers  requiring  broadband  access to the Internet.  These
customers  execute term service  agreements and are typically charged a one-time
installation fee of $3,000 per site.  Intellicom then receives monthly recurring
access fees typically  ranging from $1,350 to $3,300 per month per site based on
data transfer rates. These customers then provide dial-up  connectivity to their
end-user base using Intellicom as their primary gateway to the Internet and rely
on Intellicom to connect,  secure and maintain their network  integrity.  Unlike
its competitors,  Intellicom designs and out-sources the manufacture of its VSAT
equipment specifically for its applications.

Intellicom  also sells a variety of products and  services,  including  the Edge
Connector (TM) which is a turnkey  Internet server with an integrated  series of
application  software packages and CachePlus (TM),  Intellicom's network caching
solution. All of these products and services are integrated to provide customers
with a total solution to their Internet application needs.

Finally,  Intellicom also provides  traditional  data  processing  services to a
number of large commercial  users. This business is considered a legacy business
and is expected to end in the fourth fiscal quarter of 1999.

Cost of Services. Costs to us include installation costs, connectivity costs and
in the case of cable modems that are sold or financed, the cost of such modems.

Installation costs vary by type of connectivity and type of customer.  We charge
new cable modem  subscribers a one-time fee to defray the costs of installation,
which includes labor and overhead. While currently the installation fee does not
cover the entire  cost  incurred  by us, we expect  over time that  installation
costs will decline as cable modems become more  standardized  and as they become
commercially  available  both through  retail outlets and eventually as standard
equipment bundled in new personal computers.

Connectivity costs include the cost of connection to the public switch telephone
network.  Such  connections  are required,  among other reasons,  to service our
dial-up customers as well as to provide those cable modem customers located on a
one-way cable system the return path, or upstream link, to our equipment located
at the cable operator's head-end.  Accordingly, we incur higher costs associated
with providing our services  through  one-way cable systems.  Consequently,  the
rate at which our cable  affiliates  upgrade  their  cable  systems  to  two-way
capability will have a direct impact on our profit margins.

In addition,  we incur  telecommunications  costs  associated  with our Internet
backbone    connectivity   as   well   as   costs    associated   with   leasing
telecommunications  capacity  such as fiber where such  capacity is used,  among
other  things,  to link our  equipment at the cable system  head-end back to our
network operations center in Mountain View,  California.  We also incur expenses
associated with satellite capacity required for Intellicom, which is leased from
GE Americom and Satmex.  We  anticipate  that the  utilization  of  Intellicom's
network  as  a  substitute  for  third  party  terrestrial  links  will  provide
significant cost savings to us as it grows. There are two major cost benefits to
us in using  Intellicom's  VSAT  capacity to  supplement  or replace our current
landline-based  communications  infrastructure.  First, for downstream  Internet
traffic,  it enables us to simultaneously  broadcast data from one single source
to our entire network of  head-end-based  receivers  which, in conjunction  with
other  factors  including  "caching"  produces  significant   efficiencies  over
comparable  landline systems.  Second,  for upstream  traffic,  it permits us to
allocate the necessary  capacity required by each head-end in smaller increments
(and consequently  lower cost) than would be available using terrestrial  links,
such as T1 lines.

Operating Expenses.  Operating expenses include (i) sales and marketing expense,
which  consists  primarily of salaries,  commission,  and  promotional  expenses
associated with the direct  marketing and sales effort,  as well as the expenses
associated with telemarketing,  customer care and new business development; (ii)
engineering  expense,  which  consists  primarily of salaries and related  costs
associated with our network  operations  center,  field engineering and research
staff; and (iii) general and administrative expense, which consists primarily of
salaries and associated  professional  costs related to our executive,  finance,
legal, human resources and other administrative  functions.  We expect operating
expenses to continue  to  increase  as we ramp-up  our efforts  associated  with
increasing cable modem customer  penetration in our existing markets,  and as we
grow our business by introducing our services in new markets.

<PAGE>

Also  included  in  operating   expenses  is  depreciation   and   amortization.
Amortization  expense  includes the capitalized  costs associated with our cable
affiliate  incentive program,  as well as the costs associated with goodwill and
other intangible assets. As a result of the Intellicom acquisition,  we recorded
a significant  amount of intangible assets,  classified as acquired  technology,
which will adversely affect our earnings and  profitability  for the foreseeable
future.  If the amount of such recorded  acquired  technology is increased or we
have  future  losses and are unable to  demonstrate  our  ability to recover the
amount of acquired technology  recorded during such time periods,  the period of
amortization  could  be  shortened,  which  may  further  increase  amortization
charges.

Compensation  Expense Related to Stock Options. We record non-cash  compensation
expense  related to the value  attributed  to common  stock  options  granted to
non-employees.  The non-vested portions of these option grants are revalued on a
quarterly basis with respect to the then current fair market value of our common
stock using the Black-Scholes  method. These non-cash  compensation expenses are
then amortized over their respective  vesting periods,  which is typically three
years.

In addition to the above, during the period from October 1998 to April 1999, the
Company granted to certain employees, pending stockholder approval, an aggregate
of 1,618,550  incentive  and  non-qualified  common stock  options at a weighted
average  exercise  price of $12.74  per  share,  net of  employee  terminations.
Following approval of the 1998 Stock Incentive Plan at the annual  stockholders'
meeting,  the Company  will  recognize a non-cash  compensatory  charge over the
remaining  vesting period totaling  approximately  $76.6 million relating to the
issuance of these stock  options.  Although all of the options  issued under the
1998 Stock Incentive Plan were granted at what was then the fair market value of
the Company's  common stock on the date of grant,  the Company must  recognize a
non-cash compensation charge for the difference between the various grant prices
and $59.875,  the closing price of the Company's common stock on the date of the
annual stockholders' meeting.

Capital  Expenditures.  In order to pursue our business plan, we expect to incur
significant  capital  expenditures  to provide  our turnkey  solution  for cable
operators,  principally  relating to the installation of head-end  equipment and
the purchase of customer  premise  equipment  such as cable modems and satellite
service related equipment.  The cost of cable modems is expected to decline over
time as economies of scale in production  and the advent of new market  entrants
in manufacturing  cable modems push prices down.  However, we recognize that, in
line with experience in other subscription  service  industries,  we may need to
subsidize both the cost of  installation  and the cable modem  equipment for the
customer.  Such expenditures,  however, are expected to be offset in part by the
savings  resulting  from  decreased  costs of  installation  and prices for such
equipment  as  equipment  is  standardized  and  production   volumes  increase,
respectively.

Results of  operations  for the Three Months Ended June 30, 1999 compared to the
Three Months Ended June 30, 1998

Net Sales.  Consolidated  net sales  increased  $1.0  million,  or 342%, to $1.3
million for the three months  ended June 30,  1999,  as compared to $298,000 for
the same period in 1998. Net sales for ISP Channel increased $423,000,  or 142%,
to $721,000 for the three  months  ended June 30, 1999,  as compared to $298,000
for the same period in 1998, as a result of signing up new cable  affiliates and
obtaining new cable modem  customers.  Net sales  associated  with ISP Channel's
subscriber  fees increased  $207,000,  or 235%, to $295,000 for the three months
ended June 30,  1999,  as compared  to $88,000 for the same period in 1998.  Net
sales   associated  with  the  installation  of  cable  modems  to  ISP  Channel
subscribers  increased  $179,000 to $196,000 for the three months ended June 30,
1999,  as  compared  to $17,000  for the same  period in 1998.  We believe  that
subscriber fee and cable modem  installation  revenues will continue to increase
as ISP Channel continues to rollout its business plan. Net sales associated with
the segment's non-cable based dial-up and  business-to-business  Internet access
offerings increased $37,000, or 19%, to $230,000 as compared to $193,000 for the
same period in 1998.

In addition to the net sales of ISP Channel,  our consolidated net sales for the
quarter  ended June 30, 1999 now include  the  results of  Intellicom,  which we
acquired in February  1999.  Net sales for Intellicom for the three months ended
June 30, 1999, were $596,000.  Of this total, $314,000 represents net sales from
Intellicom's core business of satellite-based  Internet services.  The remaining
$282,000 represents other sources of revenue, of which the biggest component was
$196,000  from  non-satellite-based  data  processing,  a  legacy  business  for
Intellicom.  We believe that  satellite-based  revenues  will grow in the future
while data  processing  revenues  are  expected to end during the fourth  fiscal
quarter of 1999.

<PAGE>

Cost of Sales.  Consolidated  cost of sales increased $1.1 million,  or 336%, to
$1.5 million for the three  months ended June 30, 1999,  as compared to $335,000
for the same period in 1998. Cost of sales for ISP Channel  increased  $665,000,
or 199%,  to $1.0 million for the three months ended June 30, 1999,  as compared
to $335,000 for the same period in 1998, as a result of the corresponding growth
in net sales.  The single  largest  component of ISP Channel's cost of sales are
telephony costs,  which amounted to $695,000 for the quarter ended June 30, 1999
as compared to $286,000 for the same period in 1998. We believe that these costs
will  remain  the same or  decrease  as a  percentage  of total net sales as ISP
Channel expects to realize some degree of cost savings in its telephony  charges
due to the replacement of high cost terrestrial telephone links in certain areas
with Intellicom's  satellite-based  technology,  which has a lower cost basis in
most cases.

In addition to the cost of sales of ISP Channel,  our consolidated cost of sales
for the quarter ended June 30, 1999 now include the results of Intellicom, which
we acquired in February 1999.  Cost of sales for Intellicom for the three months
ended June 30, 1999 were $460,000.  The single largest component of Intellicom's
cost of  sales  are the  transponder  fees  that it pays  for  leased  satellite
capacity,  which  amounted to $266,000 for the quarter  ended June 30, 1999.  We
believe that these costs will increase as Intellicom  has plans to lease segment
space  on  additional  satellites  in  the  future  in  anticipation  of a  more
aggressive roll-out of Intellicom's business plan.

Selling and Marketing.  Consolidated  selling and marketing  expenses  increased
$3.3 million, or 383%, to $4.2 million for the three months ended June 30, 1999,
as  compared  to $869,000  for the same  period in 1998.  Selling and  marketing
expenses for ISP Channel  increased  $3.1 million,  or 358%, to $4.0 million for
the three  months  ended June 30,  1999,  as compared  to $869,000  for the same
period in 1998. The  significant  growth in ISP Channel's  selling and marketing
expense  is a result of the  significant  hiring  that we have done to  properly
staff these  departments.  In  addition,  ISP Channel  launched  its  first-ever
nationwide  marketing  campaign,  "Run with the Fast  Crowd" in an effort to add
subscribers,  as well as to attract new cable affiliates.  We believe that these
costs will continue to increase as ISP Channel continues to develop its business
and enhance its sales efforts with recurring nationwide marketing campaigns.

In  addition  to  the  selling  and  marketing  expenses  of  ISP  Channel,  our
consolidated   selling  and  marketing  expenses  now  include  the  results  of
Intellicom,  which we acquired in February 1999.  Selling and marketing expenses
for  Intellicom  for the three  months  ended June 30,  1999 were  $217,000.  We
believe  that these  costs will  increase  as  Intellicom  begins to staff these
functions  in  anticipation  of rolling out its  business  plan to generate  new
customers.

Engineering.  Consolidated engineering expenses increased $1.7 million, or 979%,
to $1.9  million  for the three  months  ended June 30,  1999,  as  compared  to
$172,000  for the same  period in 1998.  Engineering  expenses  for ISP  Channel
increased $1.5 million, or 886%, to $1.7 million for the three months ended June
30, 1999, as compared to $172,000 for the same period in 1998. The growth in ISP
Channel's  engineering  expense is a result of the  hiring  that we have done to
properly staff this department as ISP Channel continues to grow. We believe that
these costs will  continue to increase as ISP Channel  continues  to develop its
business.

In  addition  to the  engineering  expenses  of ISP  Channel,  our  consolidated
engineering expenses now include the results of Intellicom, which we acquired in
February  1999.  Engineering  expenses for Intellicom for the three months ended
June 30,  1999 were  $160,000.  We believe  that these  costs will  increase  as
Intellicom  begins to staff these  functions in  anticipation of rolling out its
business plan to generate new customers.

General and  Administrative.  Consolidated  general and administrative  expenses
increased $987,000,  or 68%, to $2.4 million for the three months ended June 30,
1999, as compared to $1.5 million for the same period in 1998. Our corporate and
ISP Channel general and administrative  expenses increased $650,000,  or 45%, to
$2.1  million  for the three  months  ended June 30,  1999,  as compared to $1.5
million for the same period in 1998. The growth in our corporate and ISP Channel
general and  administrative  expense is a result of the hiring that we have done
to properly staff our  administrative,  executive and finance  departments as we
continue to grow.  We believe  that these  costs will  continue to increase as a
result of the continued expansion of our administrative  staff and facilities to
support growing operations.

In addition to the  general and  administrative  expenses of ISP Channel and our
corporate operations,  our consolidated general and administrative  expenses now
include the results of Intellicom,  which we acquired in February 1999.  General
and  administrative  expenses for Intellicom for the three months ended June 30,
1999 were  $337,000.  We believe  that these costs will  increase as  Intellicom
begins to staff these functions to support growing operations.

<PAGE>

Depreciation  and  Amortization.   Consolidated  depreciation  and  amortization
expenses  increased $1.6 million,  or 674%, to $1.8 million for the three months
ended June 30,  1999,  as  compared  to  $234,000  for the same  period in 1998.
Depreciation  and  amortization  for ISP  Channel and our  corporate  operations
increased $939,000, or 401%, to $1.2 million for the three months ended June 30,
1999,  as  compared  to  $234,000  for the same  period  in 1998 as a result  of
increased  depreciation  on expanded  property,  plant and  equipment as well as
amortization of costs associated with ISP Channel's Cable  Affiliates  Incentive
Program.  We believe that these  expenses will increase as we continue to expand
our facilities and continue to offer additional  incentives to acquire new cable
affiliates.  In particular,  we expect the  amortization of the intangible asset
associated with ISP Channel's  Cable  Affiliates  Incentive  Program to increase
significantly  as a result of the  agreement  with  Mediacom and other new cable
affiliates.

In addition to the depreciation and amortization expenses of ISP Channel and our
corporate  operations,  our consolidated  depreciation and amortization expenses
now  include  the results of  Intellicom,  which we  acquired in February  1999.
Depreciation and amortization expenses for Intellicom for the three months ended
June 30,  1999 were  $637,000,  of which  $574,000  represents  amortization  of
acquired  technology,  the  intangible  asset  created  by  the  acquisition  of
Intellicom.  We believe that depreciation will increase as Intellicom  continues
to expand its facilities, while amortization is expected to remain the same.

Compensation  Expense Related to Stock Options.  For the three months ended June
30, 1999, we recognized a non-cash compensation expense related to stock options
of $5.7  million,  of which $5.4 million  related to employee  stock options and
$300,000 to non-employees. Generally accepted accounting principles require that
options issued to  non-employees  be  "marked-to-market"  until such time as the
options have been earned. Therefore, we expect this amount to either increase or
decrease based on the fluctuations in the trading price of our common stock. The
amount related to employee stock options is expected to remain about the same in
future quarters.

Interest Expense. Consolidated interest expense increased $2.2 million, or 905%,
to $2.5  million  for the three  months  ended June 30,  1999,  as  compared  to
$244,000  for the same  period  in 1998.  This was a result of  increased  lease
financing  associated with the capital expansion needs of ISP Channel as well as
increased  debt  at  the  corporate  level,   including  the  $12.0  million  of
convertible  subordinated  loan notes issued in January  1999,  amortization  of
deferred debt issuance costs  associated with these loan notes,  and finally the
promissory  notes issued in  connection  with the  acquisition  of Intellicom in
February 1999.

Interest  Income.  Consolidated  interest  income was $1.3 million for the three
months ended June 30, 1999,  as compared to $32,000 for the same period in 1998.
This  increase  was  primarily  due to the  increased  cash and cash  equivalent
balances from the proceeds of the Secondary Offering.

Other.  Other expense was $1.4 million for the three months ended June 30, 1999,
as compared to $49,000 for the same period in 1998.  This increase was primarily
a result  of the  indirect  expenses  associated  with the  Company's  financing
activities, including the Secondary Offering, as well as the penalty incurred in
connection with the Series C redeemable convertible preferred stock.

Income  Taxes.  We made no provision for income taxes for the three months ended
June 30, 1999, as a result of our continuing losses.

Loss from  Discontinued  Operations.  We  recognized  a net loss of $15,000 from
discontinued  operations for the three months ended June 30, 1999 as compared to
$32,000  for the  same  period  in  1998.  This  consisted  of a net loss in our
document management segment of $15,000 for the three months ended June 30, 1999,
as compared to a net loss of $285,000 in the document management segment and net
income of  $253,000  in the  telecommunications  segment  for the same period in
1998. Our telecommunications  segment, KCI, sold substantially all of its assets
in February 1999. Operations from this discontinued operation ceased on the date
of disposition.

Net Loss. For the three months ended June 30, 1999, we had a net loss applicable
to common shares of $18.7 million,  or a loss per share of $1.27,  compared to a
net loss of $3.1  million  for the same  period in 1998,  or a loss per share of
$0.42.


<PAGE>



Results of  operations  for the Nine Months Ended June 30, 1999  compared to the
Nine Months Ended June 30, 1998

Net Sales.  Consolidated  net sales  increased  $2.0  million,  or 265%, to $2.8
million for the nine months ended June 30, 1999, as compared to $764,000 for the
same period in 1998. Net sales for ISP Channel increased  $950,000,  or 124%, to
$1.7 million for the nine months  ended June 30,  1999,  as compared to $764,000
for the same period in 1998, as a result of signing up new cable  affiliates and
obtaining new subscribers.  Net sales  associated with ISP Channel's  subscriber
fees increased $485,000, or 251%, to $678,000 for the nine months ended June 30,
1999, as compared to $193,000 for the same period in 1998. Net sales  associated
with the  installation  of cable  modems to ISP  Channel  subscribers  increased
$427,000 to $459,000  for the nine months  ended June 30,  1999,  as compared to
$32,000 for the same period in 1998.  We believe that  subscriber  fee and cable
modem  installation  revenues will continue to increase as ISP Channel continues
to rollout its business plan. Net sales associated with the segment's  non-cable
based  dial-up and  business-to-business  Internet  access  offerings  increased
$38,000 to $577,000 as compared to $539,000 for the same period in 1998.

In addition to the net sales of ISP Channel,  our consolidated net sales for the
quarter  ended June 30, 1999 now include  the  results of  Intellicom,  which we
acquired in February 1999. Net sales for Intellicom from the date of acquisition
through June 30, 1999, were $1.1 million. Of this total, $527,000 represents net
sales from Intellicom's core business of satellite-based  Internet services. The
remaining  $547,000  represents  other sources of revenue,  of which the biggest
component  was  $324,000  from  non-satellite-based  data  processing,  a legacy
business for Intellicom.  We believe that satellite-based  revenues will grow in
the future  while data  processing  revenues  are  expected to end in the fourth
fiscal quarter of 1999.

Cost of Sales.  Consolidated  cost of sales increased $2.2 million,  or 371%, to
$2.8 million for the nine months  ended June 30,  1999,  as compared to $585,000
for the same  period  in 1998.  Cost of sales  for ISP  Channel  increased  $1.4
million,  or 238%,  to $2.0 million for the nine months ended June 30, 1999,  as
compared  to  $585,000  for  the  same  period  in  1998,  as a  result  of  the
corresponding growth in net sales. The single largest component of ISP Channel's
cost of sales are telephony  costs,  which amounted to $1.5 million for the nine
months  ended June 30, 1999 as compared to $519,000 for the same period in 1998.
We believe that these costs will remain the same or decrease as a percentage  of
total net sales as ISP Channel expects to realize some degree of cost savings in
its telephony  charges due to the  replacement  of expensive T1 lines in certain
areas with Intellicom's satellite-based technology, which has a lower cost basis
in most cases.

In addition to the cost of sales of ISP Channel,  our consolidated cost of sales
for the nine months  ended June 30, 1999 now include the results of  Intellicom,
which we acquired in February 1999.  Cost of sales for Intellicom  from the date
of acquisition through June 30, 1999 were $781,000. The single largest component
of Intellicom's  cost of sales are the transponder  fees that it pays for leased
satellite  capacity,  which  amounted to $439,000 for the nine months ended June
30, 1999. We believe that these costs will  increase as Intellicom  has plans to
lease segment space on additional  satellites in the future in anticipation of a
more aggressive roll-out of Intellicom's business plan.

Selling and Marketing.  Consolidated  selling and marketing  expenses  increased
$7.3  million  to $8.6  million  for the nine  months  ended June 30,  1999,  as
compared  to $1.3  million for the same  period in 1998.  Selling and  marketing
expenses  for ISP Channel  increased  $7.0  million to $8.3 million for the nine
months ended June 30,  1999,  as compared to $1.3 million for the same period in
1998. The significant growth in ISP Channel's selling and marketing expense is a
result of the  significant  hiring  that we have done to  properly  staff  these
departments.  In  addition,  ISP  Channel  launched  its  first-ever  nationwide
marketing  campaign,  "Run with the Fast Crowd" in an effort to add subscribers,
as well as to attract  new cable  affiliates.  We believe  that these costs will
continue  to  increase as ISP Channel  continues  to develop  its  business  and
enhance its sales efforts with recurring nationwide marketing campaigns.

In  addition  to  the  selling  and  marketing  expenses  of  ISP  Channel,  our
consolidated   selling  and  marketing  expenses  now  include  the  results  of
Intellicom,  which we acquired in February 1999.  Selling and marketing expenses
for Intellicom from the date of acquisition through June 30, 1999 were $262,000.
We believe that these costs will  increase as  Intellicom  begins to staff these
functions  in  anticipation  of rolling out its  business  plan to generate  new
customers.

<PAGE>

Engineering.  Consolidated engineering expenses increased $2.9 million, or 759%,
to $3.3 million for the nine months ended June 30, 1999, as compared to $387,000
for the same period in 1998. Engineering expenses for ISP Channel increased $2.8
million,  or 717%,  to $3.2 million for the nine months ended June 30, 1999,  as
compared to $387,000  for the same period in 1998.  The growth in ISP  Channel's
engineering  expense  is a result of the  hiring  that we have done to  properly
staff this  department  as we continue to grow. We believe that these costs will
continue to increase as ISP Channel continues to develop its business.

In  addition  to the  engineering  expenses  of ISP  Channel,  our  consolidated
engineering expenses now include the results of Intellicom, which we acquired in
February 1999.  Engineering expenses for Intellicom from the date of acquisition
through June 30, 1999 were  $163,000.  We believe that these costs will increase
as Intellicom begins to staff these functions in anticipation of rolling out its
business plan to generate new customers.

General and  Administrative.  Consolidated  general and administrative  expenses
increased $3.8 million,  or 138%, to $6.6 million for the nine months ended June
30, 1999, as compared to $2.8 million for the same period in 1998. Our corporate
and ISP Channel general and administrative  expenses increased $3.2 million,  or
115%,  to $6.0 million for the nine months  ended June 30, 1999,  as compared to
$2.8 million for the same period in 1998.  The growth in our  corporate  and ISP
Channel general and administrative  expenses are a result of the hiring that the
we have  done to  properly  staff  our  administrative,  executive  and  finance
departments as we continue to grow. We believe that these costs will continue to
increase as a result of the continued expansion of our administrative  staff and
facilities to support growing operations.

In addition to the  general and  administrative  expenses of ISP Channel and our
corporate operations,  our consolidated general and administrative  expenses now
include the results of Intellicom,  which we acquired in February 1999.  General
and administrative  expenses for Intellicom from the date of acquisition through
June 30,  1999 were  $633,000.  We believe  that these  costs will  increase  as
Intellicom begins to staff these functions to support growing operations.

Depreciation  and  Amortization.   Consolidated  depreciation  and  amortization
expenses  increased  $3.2 million,  or 544%, to $3.7 million for the nine months
ended June 30,  1999,  as  compared  to  $580,000  for the same  period in 1998.
Depreciation and amortization for ISP Channel and corporate  overhead  increased
$2.1 million,  or 362%, to $2.7 million for the nine months ended June 30, 1999,
as  compared to  $580,000  for the same period in 1998 as a result of  increased
depreciation on expanded  property,  plant and equipment as well as amortization
of costs associated with ISP Channel's Cable Affiliates  Incentive  Program.  We
believe  that  these  expenses  will  increase  as we  continue  to  expand  our
facilities  and  continues to offer  additional  incentives to acquire new cable
affiliates.  In particular,  we expect the  amortization of the intangible asset
associated with ISP Channel's  Cable  Affiliates  Incentive  Program to increase
significantly  as a result of the  agreement  with  Mediacom and other new cable
affiliates.

In addition to the depreciation and amortization expenses of ISP Channel and our
corporate  operations,  our consolidated  depreciation and amortization expenses
now  include  the results of  Intellicom,  which we  acquired in February  1999.
Depreciation  and  amortization   expenses  for  Intellicom  from  the  date  of
acquisition  through  June  30,  1999  were  $1.1  million,  of  which  $957,000
represents amortization of acquired technology,  the intangible asset created by
the  acquisition of Intellicom.  We believe that  depreciation  will increase as
Intellicom continues to expand its facilities, while amortization is expected to
remain the same.

Compensation  Expense  Related to Stock Options.  For the nine months ended June
30, 1999, we recognized a non-cash compensation expense related to stock options
of $6.7  million,  of which $5.4 million  related to employee  stock options and
$1.3 million to non-employees.  Generally accepted accounting principles require
that options issued to  non-employees be  "marked-to-market"  until such time as
the  options  have  been  earned.  Therefore,  we expect  this  amount to either
increase  or decrease  based on the  fluctuations  in the  trading  price of our
common stock.  The amount  related to employee stock options is also expected to
increase in future periods as this expense only began to be incurred in April of
1999.

Interest Expense. Consolidated interest expense increased $2.9 million, or 430%,
to $3.6 million for the nine months ended June 30, 1999, as compared to $676,000
for the same  period in 1998.  This was a result of  increased  lease  financing
associated with the capital  expansion needs of ISP Channel as well as increased
debt  at the  corporate  level,  including  the  $12.0  million  of  convertible
subordinated  loan notes issued in January 1999,  amortization  of deferred debt
issuance costs  associated with these loan notes including the value  attributed
to the  beneficial  conversion  feature  of the  loan  notes,  and  finally  the
promissory  notes issued in  connection  with the  acquisition  of Intellicom in
February 1999.

Interest  Income.  Consolidated  interest  income was $1.6  million for the nine
months ended June 30, 1999,  as compared to $40,000 for the same period in 1998.
This  increase  was  primarily  due to the  increased  cash and cash  equivalent
balances from the proceeds of the Secondary Offering.

<PAGE>

Other.  Other  expense was $1.4 million for the nine months ended June 30, 1999,
as compared to $48,000 for the same period in 1998.  This increase was primarily
a result  of the  indirect  expenses  associated  with the  Company's  financing
activities, including the Secondary Offering, as well as the penalty incurred in
connection with the Series C redeemable convertible preferred stock.

Income  Taxes.  We made no provision  for income taxes for the nine months ended
June 30, 1999, as a result of our continuing losses.

Loss from  Discontinued  Operations.  We  recognized a net loss of $399,000 from
operations  of  our  discontinued  telecommunications  and  document  management
segments  for the nine  months  ended June 30, 1999 as compared to a net loss of
$1.1  million for the same period in 1998.  This  consisted of a net loss in our
document management segment of $568,000 for the nine months ended June 30, 1999,
as  compared  to $1.5  million for the same period in 1998 and net income in our
telecommunications  segment of $169,000 for the nine months ended June 30, 1999,
as  compared to $368,000  for the same  period in 1998.  Our  telecommunications
segment,  KCI, sold substantially all of its assets in February 1999. Net income
from this discontinued operation is only through the date of disposition.

Net Loss. For the nine months ended June 30, 1999, we had a net loss  applicable
to common shares of $33.2 million,  or a loss per share of $3.07,  compared to a
net loss of $6.8  million  for the same  period in 1998,  or a loss per share of
$0.95.

Liquidity and Capital Resources

Prior to the third  fiscal  quarter  of this year,  our  growth had been  funded
through a  combination  of  private  equity,  bank  debt and  lease  financings.
However,  in April 1999, we  successfully  completed both a $15.0 million equity
placement with one of our cable affiliates and a secondary public offering which
contributed an additional  $142.0 million in net proceeds.  As of June 30, 1999,
the Company had approximately  $152.0 million of unrestricted  cash. We believe,
as a result  of this,  that we  currently  have  sufficient  cash and  financing
commitments  to meet our  funding  requirements  for our current  business  plan
through at least  fiscal  2000.  However,  we have  experienced  and continue to
experience negative operating margins and negative cash flow from operations, as
well as an ongoing requirement for substantial additional capital investment. We
expect that we will need to raise additional  capital to accomplish our business
plan beyond the next two years.  Our future cash  requirements  for our business
plan  expansion  will  depend on a number of factors  including  (i) the cost of
attracting and signing up new cable affiliates,  (ii) cable modem and associated
costs of equipment,  (iii) the rate at which  subscribers  purchase our Internet
service offering and the pricing of these services,  (iv) the level of marketing
required to acquire and retain subscribers and to attain a competitive  position
in the marketplace, (v) the rate at which we enter new markets and introduce new
services and (vi) the rate at which we invest in the upgrade of our network.  In
addition,  we may in the future wish to selectively pursue possible acquisitions
of  businesses,  technologies,  content or products that  complement  our own in
order to  expand  and  improve  our  Internet  presence  and  achieve  operating
efficiencies.

We  recognize  that the cable and  Internet  segments  in which we  operate  are
rapidly  evolving  and  converging,  as  evidenced  by the high degree of recent
consolidation  within the cable industry and the many acquisitions and strategic
alliances  within both the cable and  Internet  sectors.  We believe that we can
become  a  significant  player  in this  process  and  that we have  unique  and
attractive  attributes that differentiate us from other companies.  However,  to
fully exploit future opportunities, we also recognize that our present financial
position,  though  sufficient for our current business plan, may be insufficient
to avail ourselves of these opportunities.

<PAGE>

For the nine months ended June 30, 1999, cash flows used in operating activities
of continuing operations were $19.6 million, as compared to $3.1 million for the
same  period in 1998.  Cash flows used in  investing  activities  of  continuing
operations  were $8.9  million  for the nine  months  ended  June 30,  1999,  as
compared to $2.0  million for the same  period in 1998.  Cash flows  provided by
financing  activities of continuing  operations were $168.3 million for the nine
months  ended June 30,  1999,  as compared to cash flows  provided by  financing
activities  of  continuing  operations  of $16.1  million for the same period in
1998.

During  February  1999,  a  single  holder  of our 9%  Convertible  Subordinated
Debentures  due  September  2000  converted  a  debenture  in the face amount of
$401,516  into 59,483 shares of our common  stock.  These 9%  debentures  have a
conversion  price of $6.75 per share.  In addition,  during  February  1999, the
Company  issued an aggregate of 782,352  shares of common stock  pursuant to the
conversion of the remaining 10,251.56 shares of the Company's outstanding Series
B redeemable  convertible  preferred stock. The Series B redeemable  convertible
preferred stock,  including accrued dividends,  was converted into common shares
at the conversion price of $13.20 per share.

On March 24, 1999, we agreed to issue  660,000  shares of our common stock to an
investor for $15.0 million and a modification of the affiliate agreement between
us and a cable  affiliate  controlled by that  investor.  This  transaction  was
completed on April 12, 1999.

On  April  28,  1999,  we  received  $142.0  million  in net  proceeds  from the
underwritten  public  sale  of  4,600,000  shares  of  our  common  stock.  This
transaction  was lead managed by BT Alex.  Brown and  co-managed  by  BancBoston
Robertson Stephens and CIBC World Markets.
Wit Capital Corporation served as e-manager on this transaction.

In May 1999,  the Company  issued an aggregate of 909,148 shares of common stock
pursuant to the conversion of the 7,625.39  shares of the Company's  outstanding
Series C redeemable  convertible  preferred stock,  representing the last of the
Company's  redeemable  convertible  preferred  stock.  The  Series C  redeemable
convertible  preferred stock,  including  accrued  dividends and penalties,  was
converted into common shares at the conversion  price of $9.00 per share.  As of
June 30, 1999, there was no redeemable convertible preferred stock outstanding.

Acquisition  of  Intellicom.  On February 9, 1999,  we completed the purchase of
Intellicom.  The  purchase  price was  comprised  of:  (i) a cash  component  of
$500,000,  less payment of certain expenses,  paid at closing; (ii) a promissory
note in the amount of $1.0 million due one year after closing, which was paid in
full  with a  combination  of cash  and  common  stock in  April  1999;  (iii) a
promissory note in the amount of $2.0 million due two years after closing;  (iv)
the issuance of 500,000 shares of our common stock (adjustable upwards after one
year in certain  circumstances);  and (v) a demonstration  bonus of $1.0 million
payable  in cash or shares of our  common  stock at our  option  within one year
after closing if certain conditions are met.  Approximately $300,000 of the $1.0
million note is payable in cash or in our common stock at our option,  while the
balance of this note is payable in cash or in our common  stock at the option of
the holders. The entire amount of the $2.0 million note is payable in cash or in
our common stock at our option.

Sale of KCI. On February 12, 1999,  substantially  all of the assets of KCI were
sold  to  Convergent   Communications   for  an  aggregate   purchase  price  of
approximately  $6.3 million subject to adjustment in certain events.  Convergent
Communications  paid  $100,000 in cash in November  1998 upon  execution  of the
letter of intent to purchase and paid the remainder of the purchase price on the
closing date as follows:  (i) $1.4 million in cash;  (ii)  approximately  30,000
shares of Convergent  Communications' parent company common stock with an agreed
value of approximately  $300,000 (the "Convergent  Shares");  (iii) a promissory
note in the  amount of $2.0  million,  bearing  simple  interest  at the rate of
eleven percent per annum, which was paid in full in July 1999; (iv) a promissory
note in the  amount  of $1.0  million  which is  payable  on the date that is 12
months following the closing date and bears simple interest at the rate of eight
percent  per  annum;  and (v) a  promissory  note in an amount of $1.5  million,
bearing simple  interest at the rate of eight percent per annum,  which was paid
in full in July 1999.  Furthermore,  a purchase price  adjustment  subsequent to
closing  provided the Company with additional  Convergent  Shares with an agreed
value of $198,000.  The initial cash proceeds received from the sale of KCI were
used to pay down our revolving credit facility with West Suburban Bank.

Sale of MTC.  On  November 5, 1998,  we agreed to sell our  document  management
business,  MTC to Global Information  Distribution GmbH ("GID") for an aggregate
purchase  price  of  approximately   $5.1  million.   GID  paid  $100,000  as  a
non-refundable  deposit upon  acceptance of the GID term sheet.  GID will pay us
the  remaining  $5.0 million at the closing.  The cash proceeds from the sale of
MTC  will be used in part to repay  our  revolving  credit  facility  with  West
Suburban  Bank.  As of June  30,  1999  there  was  approximately  $2.2  million
outstanding under this facility. The balance of the proceeds will be used to pay
for transaction  costs  associated with the sale of MTC and to increase our cash
position.  We cannot  assure,  however,  that the sale of MTC will  close on the
terms described or at all.

<PAGE>

Year 2000 Issues

Many  computer  programs  have been written using two digits rather than four to
define the  applicable  year.  This  poses a problem  at the end of the  century
because such computer  programs would not properly  recognize a year that begins
with "20" instead of "19".  This, in turn, could result in major system failures
or  miscalculations,  and is  generally  referred to as the "Year 2000 Issue" or
"Y2K  Issue".  We have  formulated  a Y2K Plan to address our Y2K issues and has
created a Y2K Task Force headed by the Director of Information  Systems and Data
Services to implement the plan. Our Y2K Plan has six phases:

     1)   Organizational  Awareness - educate our employees,  senior management,
          and the board of directors about the Y2K issue.

     2)   Inventory - complete  inventory of internal business systems and their
          relative priority to continuing business operations. In addition, this
          phase includes a complete inventory of critical vendors, suppliers and
          services providers and their Y2K compliance status.

     3)   Assessment  -  assessment  of internal  business  systems and critical
          vendors,  suppliers  and service  providers  and their Y2K  compliance
          status.

     4)   Planning - preparing  the  individual  project plans and project teams
          and other  required  internal and external  resources to implement the
          required solutions for Y2K compliance.

     5)   Execution - implementation of the solutions and fixes. 6) Validation -
          testing the solutions for Y2K compliance.

Our Y2K Plan will apply to two areas:

o      internal business systems
o      compliance by external customers and providers

Internal  Business  Systems.  Our  internal  business  systems  and  workstation
business  applications  will be a primary  area of focus.  We are in the  unique
position  of  completing  the  implementation  of new  enterprise-wide  business
solutions to replace existing manual processes and/or "home grown"  applications
during 1999. These solutions are represented by their vendors as being fully Y2K
compliant.  We have  few,  if any,  "legacy"  applications  that will need to be
evaluated for Y2K compliance.

We have completed the Inventory, Assessment and Planning Phases of substantially
all critical internal business systems. The Execution and Validation Phases will
be completed by the fourth quarter of fiscal 1999. We expect to be Y2K compliant
on all critical  systems,  which rely on the calendar  year before  December 31,
1999.

Some  non-critical  systems  may not be  addressed  until  after  January  2000.
However,  we believe such systems will not cause significant  disruptions in our
operations.

Compliance  by External  Customers and  Providers.  We are in the process of the
inventory and assessment phases of our critical suppliers, service providers and
contractors  to  determine  the  extent  to  which  our  interface  systems  are
susceptible to those third parties'  failure to remedy their own Y2K issues.  We
expect that  assessment will be complete by the fourth quarter of calendar 1999.
To the extent that responses to Y2K readiness are  unsatisfactory,  we intend to
change   suppliers,   service  providers  or  contractors  to  those  that  have
demonstrated Y2K readiness; but can not be assured that we will be successful in
finding such alternative suppliers, service providers and contractors. We do not
currently have any formal information concerning the status of our customers but
have  received  indications  that  most  of our  customers  are  working  on Y2K
compliance.

Risks  Associated  with Y2K. We believe the major risk  associated  with the Y2K
Issue is the ability of our key business  partners and vendors to resolve  their
own Y2K Issues. We will spend a great deal of time over the next several months,
working closely with suppliers and vendors, to assure their compliance.


<PAGE>



Should a  situation  occur  where a key  partner  or vendor is unable to resolve
their Y2K issue,  we will be in a position to change to Y2K  compliant  partners
and vendors.

Cost to Ad0dress Y2K Issues.  Since we are in the unique  position  implementing
new enterprise  wide business  solutions to replace  existing  manual  processes
and/or  "home  grown"  applications,  there will be little,  if any, Y2K changes
required to existing business applications. All of the new business applications
implemented (or in the process of being  implemented in 1999) are represented as
being Y2K compliant.
We  currently  believe that  implementing  our Y2K Plan will not have a material
effect on our financial position.

Contingency  Plan. We have not  formulated a  contingency  plan at this time but
expect to have specific contingency plans in place prior to September 30, 1999.

Summary.  We  anticipate  that the Y2K Issue  will not have a  material  adverse
effect on our  financial  position  or  results of  operations.  There can be no
assurance,  however, that the systems of other companies or government entities,
on which we rely for  supplies,  cash  payments,  and future  business,  will be
timely converted,  or that a failure to convert by another company or government
entities,  would not have a material adverse effect on our financial position or
results of operations.  If third party service providers and vendors, due to Y2K
Issues,  fail to provide us with  components,  materials,  or services which are
necessary  to deliver  our  services  and  product  offerings,  with  sufficient
electrical power and  transportation  infrastructure to deliver our services and
product offerings, then any such failure could have a material adverse effect on
our ability to conduct business,  as well as our financial  position and results
of operations.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

Our exposure to market risk for changes in interest  rates relates  primarily to
the  increase or  decrease  in the amount of interest  income we can earn on our
investment  portfolio  and on the increase or decrease in the amount of interest
expense we must pay with respect to our various  outstanding  debt  instruments.
The risk associated with fluctuating  interest expense is limited,  however,  to
the exposure related to those debt  instruments and credit  facilities which are
tied to market rates.  We do not use  derivative  financial  instruments  in our
investment  portfolio.  We ensure the safety and  preservation  of our  invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities.

PART II. OTHER INFORMATION

Item 2.  Changes in Securities.

On March 24, 1999, we agreed to issue  660,000  shares of our common stock to an
investor for $15,000,000 and a modification of the affiliate  agreement  between
us and a cable affiliate that the investor  controls.  We issued these shares on
April 12, 1999. These securities were issued in a nonpublic offering pursuant to
Regulation D under the Securities Act.

On April 6, 1999,  we issued 2,240  shares of common stock to one investor  upon
the conversion of $15,120 principal amount of our 9% convertible  debentures due
2000.  These  debentures  have a  conversion  price of $6.75  per  share.  These
securities  were issued  pursuant to an exemption  under Section  3(a)(9) of the
Securities Act.

On April 12, 1999,  we issued 35 shares of common stock to one investor upon the
conversion of $240 principal  amount of our 9% convertible  debentures due 2000.
These  debentures have a conversion  price of $6.75 per share.  These securities
were issued  pursuant to an exemption  under Section  3(a)(9) of the  Securities
Act.

<PAGE>

On April 13, 1999, our stockholders  approved our reincorporation  from New York
to Delaware  and  approved an  increase  in our  authorized  number of shares of
common stock from 25,000,000 to  100,000,000.  On April 14, 1999, we effectuated
the  reincorporation  by completing the merger of SoftNet  Systems,  Inc., a New
York corporation,  into its wholly-owned  subsidiary,  SoftNet Systems,  Inc., a
Delaware  corporation.  A  discussion  of  the  differences  of  the  rights  of
stockholders  under  Delaware and New York law and the effect of the increase in
our  authorized  shares of common stock is contained in proposals two and six of
our  Definitive  Proxy  Statement  on Form 14A for our 1999  annual  meeting  of
stockholders, which are incorporated by reference herein.

On April 13, 1999,  we issued 7,407 shares of common stock to one investor  upon
the conversion of $60,000 principal amount of our 6% convertible  debentures due
2002.  These  debentures  have a  conversion  price of $8.10  per  share.  These
securities  were issued  pursuant to an exemption  under Section  3(a)(9) of the
Securities Act.

On April 29, 1999,  we issued 1,586 shares of common stock to one investor  upon
the conversion of $10,710 principal amount of our 9% convertible  debentures due
2000.  These  debentures  have a  conversion  price of $6.75  per  share.  These
securities  were issued  pursuant to an exemption  under Section  3(a)(9) of the
Securities Act.

On May  12,  1999,  we  issued  6,118  shares  of  common  stock  to the  former
shareholders of Intelligent  Communications,  Inc.  ("Intellicom") in connection
with the  accelerated  payout of a $1.0 million  promissory  note issued to such
shareholders as part of the consideration paid upon acquiring Intellicom.  These
securities were issued in a non-public  offering pursuant to Section 4(2) of the
Securities Act.

On May 25, 1999,  we issued  909,148  shares of common stock to two investors in
connection  with  the  conversion  of  7,625.39  shares,  which  were all of the
outstanding  shares, of Series C redeemable  convertible  preferred stock. These
securities  had a conversion  price of $9.00 per share.  These  securities  were
issued pursuant to an exemption under Section 3(a)(9) of the Securities Act.

Item 4.  Submission of Matters to a Vote of Security Holders.

We held our annual  meeting of  stockholder's  on April 13, 1999. The results of
such meeting were reported in our  Quarterly  Report on Form 10-Q for the period
ended March 31, 1999, as filed with the  Securities  and Exchange  Commission on
May 17, 1999.

Item 5. Other Information

FACTORS AFFECTING THE COMPANY'S OPERATING RESULTS

The risks and uncertainties  described below are not the only ones that we face.
Additional  risks  and  uncertainties  not  presently  known  to us or  that  we
currently deem immaterial may also impair our business operations. If any of the
following risks actually occur, our business,  financial condition or results of
operations  could be materially  adversely  affected.  In such case, the trading
price of our common stock could decline.

We cannot  assure you that we will be  profitable  because we have  operated our
Internet services business only for a short period of time

We are in  the  process  of  selling  our  one  remaining  non-Internet  related
subsidiary to focus on substantial  expansion of our Internet  subsidiares,  ISP
Channel  and  Intellicom.  We cannot  assure you that our  ability to develop or
maintain  strategies  and business  operations  for our Internet  services  will
achieve  positive cash flow and  profitability.  We acquired ISP Channel in June
1996 and  Intellicom in February  1999. As such, we have very limited  operating
history  and  experience  in the  Internet  services  business.  The  successful
expansion  of  both  the  ISP  Channel  and  Intellicom  services  will  require
strategies and business  operations that differ from those we have  historically
employed.  To be  successful,  we must develop and market  products and services
that are widely accepted by consumers and businesses at prices that provide cash
flow  sufficient  to meet our debt  service,  capital  expenditures  and working
capital requirements.

Our  business  may fail if the  industry  as a whole fails or our  products  and
services do not gain commercial acceptance

It has become feasible to offer Internet  services over existing cable lines and
equipment  on a  broad  scale  only  recently.  There  is no  proven  commercial
acceptance of cable-based  Internet services and none of the companies  offering
such  services  are  currently  profitable.  It is currently  very  difficult to
predict whether  providing  cable-modem  Internet  services will become a viable
industry.

<PAGE>

The success of the ISP Channel  service will depend upon the  willingness of new
and existing cable  subscribers to pay the monthly fees and  installation  costs
associated with the service and to purchase or lease the equipment  necessary to
access the Internet.  Accordingly,  we cannot predict  whether our pricing model
will prove to be viable, whether demand for our services will materialize at the
prices we expect to charge,  or whether current or future pricing levels will be
sustainable.  If we do not  achieve or  sustain  such  pricing  levels or if our
services do not achieve or sustain broad market  acceptance,  then our business,
financial condition, and prospects will be materially adversely affected.

Our continued negative cash flow and net losses may depress stock prices

Our continued  negative cash flow and net losses may result in depressed  market
prices  for our common  stock.  We cannot  assure you that we will ever  achieve
favorable  operating  results or  profitability.  We have sustained  substantial
losses over the last five fiscal years.  For the fiscal year ended September 30,
1998,  we had a net loss of $17.3 million and for the nine months ended June 30,
1999,  we had a net loss of  $33.2  million.  We  expect  to  incur  substantial
additional  losses and experience  substantial  negative cash flows as we expand
the ISP Channel service.  The costs of expansion will include expenses  incurred
in connection with:

     o    inducing cable affiliates to enter into exclusive multi-year contracts
          with us;

     o    installing the equipment  necessary to enable our cable  affiliates to
          offer our services;

     o    research and development of new product and service offerings;

     o    the  continued  development  of our direct and  indirect  selling  and
          marketing efforts; and

     o    possible  charges  related  to  acquisitions,  divestitures,  business
          alliances  or changing  technologies,  including  the  acquisition  of
          Intelligent Communications, Inc.

If we do not achieve cash flows sufficient to support our operations,  we may be
unable to implement our business plan

The development of our business will require  substantial capital infusions as a
result of:

     o    our need to enhance  and  expand  product  and  service  offerings  to
          maintain our competitive position and increase market share; and

     o    the  substantial  investment  in  equipment  and  corporate  resources
          required  by the  continued  national  launching  of the  ISP  Channel
          service.

In addition,  we anticipate  that the majority of cable  affiliates with one-way
cable  systems will  eventually  upgrade their cable  infrastructure  to two-way
cable  systems,  at which  time we will have to  upgrade  our  equipment  on any
affected  cable system to handle  two-way  transmissions.  We cannot  accurately
predict whether or when we will ultimately  achieve cash flow levels  sufficient
to support  our  operations,  development  of new  products  and  services,  and
expansion of the ISP Channel service.  Unless we reach such cash flow levels, we
will require  additional  financing to provide  funding for  operations.  In the
event we complete a long-term debt  financing,  we will be highly  leveraged and
such debt  securities  will have  rights  or  privileges  senior to those of our
current  stockholders.  In the event that equity  securities are issued to raise
additional  capital,  the  percentage  ownership  of our  stockholders  will  be
reduced, stockholders may experience additional dilution and such securities may
have rights,  preferences and privileges senior to those of our common stock. In
the event that we cannot generate  sufficient cash flow from operations,  or are
unable to borrow or otherwise  obtain  additional  funds on  favorable  terms to
finance operations when needed, our business, financial condition, and prospects
would be materially adversely affected.

<PAGE>

The unpredictability of our quarter-to-quarter  results may adversely affect the
trading price of our common stock

We   cannot   predict   with   any   significant   degree   of   certainty   our
quarter-to-quarter   operating   results.   As  a  result,   we   believe   that
period-to-period  comparisons  of our revenues and results of operations are not
necessarily meaningful and you should not rely upon them as indicators of future
performance.  It is likely that in one or more future  quarters  our results may
fall below the  expectations  of analysts  and  investors.  In such  event,  the
trading  price of our common  stock would likely  decrease.  Many of the factors
that cause our  quarter-to-quarter  operating  results to be  unpredictable  are
largely beyond our control. These factors include, among others:

     o    the number of subscribers who retain our Internet services;

     o    our ability and that of our cable affiliates to coordinate  timely and
          effective  marketing  strategies,  in  particular,  our  strategy  for
          marketing the ISP Channel  service to subscribers in such  affiliates'
          local cable areas;

     o    the rate at which our cable affiliates can complete the  installations
          required to initiate service for new subscribers;

     o    the amount and timing of capital expenditures and other costs relating
          to the expansion of the ISP Channel service;

     o    competition in the Internet or cable industries; and

     o    changes in law and regulation.

Existing contractual  obligations allow for additional issuances of common stock
upon a market price  decline,  which could further  adversely  affect the market
price for our common stock

The total number of shares of our common stock underlying all of our convertible
securities,  assuming  the maximum  amounts  that we could be obligated to issue
without our consent,  including common stock  underlying  unvested stock options
and grants made under our 1998 Stock Incentive Plan and 1999 Supplemental  Stock
Incentive  Plan,  is 5,266,000,  which would have been 23.8% of our  outstanding
common stock as of June 30, 1999, assuming such shares would have been issued as
of such date.  The  issuance  of common  stock as a result of these  obligations
could result in immediate and substantial  dilution to the holders of our common
stock.  We are obligated to issue up to 4,521,912  shares of our common stock on
the  exercise of  warrants  and  options  and the  conversion  of certain of our
convertible debt. In addition, our 9% senior subordinated  convertible notes due
2001 can convert into a minimum of 744,088  shares of common  stock  without our
consent.  However, we do not know the exact number of shares of our common stock
that we will  issue  upon  conversion  of these  securities  because  they  have
floating  conversion  prices  based on the average  market  prices of the common
stock for a number of trading days immediately  prior to conversion.  Generally,
decreases in the market price of the common stock below their initial conversion
prices  would  result in more  shares of common  stock  being  issued upon their
conversion.

The  following  table sets forth the number of shares of common  stock  issuable
upon  conversion of our 9% senior  subordinated  convertible  notes due 2001 and
percentage  ownership (as  determined  in accordance  with the rules of the SEC)
that each represents assuming:

     o    the market price of the common stock is 25%,  50%, 75% and 100% of the
          market price of the common  stock on June 30,  1999,  which was $27.88
          per share;

     o    the  conversion  price  was equal to the  market  price at the time of
          conversion  in the event the  market  price was less than the  maximum
          conversion price; and

     o    the 1,717,587  share limit with respect to the 9% senior  subordinated
          convertible  notes was not in effect.  See "Risks  associated  with 9%
          senior subordinated convertible note financing."

On June 30, 1999,  there were 16,840,440  shares of common stock and $12,270,000
principal  amount under the 9% senior  subordinated  convertible  notes due 2001
outstanding.


<PAGE>



                             9% Senior Subordinated
                                Convertible Notes
      Percentage of              Shares
      Market Price             Underlying         %

       25% ($6.97)             1,760,402         9.5
      50% ($13.94)              880,201          5.0
      75% ($20.91)              744,088          4.2
      100% ($27.88)             744,088          4.2

Dilution may result in a decrease in the market price of our common stock

To the extent any of these shares of common  stock are issued,  the market price
of our common stock may decrease because of the additional shares on the market.
If the actual price of the common stock decreases,  the holders of our 9% senior
subordinated  convertible  notes could  convert into  greater  amounts of common
stock,  the sales of which could further  depress the stock price.  In addition,
any significant  downward  pressure on the market price of the common stock that
may be caused by the  holders of the 9% senior  subordinated  convertible  notes
converting and selling  material  amounts of common stock could  encourage short
sales by such holders or others.  Such short sales could place further  downward
pressure  on the price of our  common  stock.  There are  several  factors  that
influence  the market  price of our  common  stock.  See " - Our stock  price is
volatile."

The ownership  limitations in the 9% Senior  Subordinated  Convertible Notes due
2001 may not protect against dilution

The terms of our 9% senior subordinated  convertible notes due 2001 do not allow
us to issue shares of our common stock to holders of our 9% senior  subordinated
convertible  notes,  if such issuance would result in such holders  beneficially
owning more than 4.99% of our  outstanding  common  stock.  The 4.99%  ownership
limitation  does not prevent the holders from  converting  into common stock and
then selling such common stock to stay below the limitation.

Risks associated with 9% senior subordinated convertible note financing

The  agreements  with the purchasers of the 9% senior  subordinated  convertible
notes and warrants  contain terms and covenants that could result in substantial
dilution to our  stockholders.  The financing could also make future  financings
and loans and merger and acquisition activities more difficult and could require
us to expend  substantial  amounts of cash in order to satisfy  our  obligations
under the financing agreements.

Restrictions on Mergers and Consolidations

Certain  provisions  could  discourage  some  potential  purchasers by making an
acquisition  of our  Company  or an asset  sale more  difficult  and  expensive,
including:

              o      participation by the holders of the 9% senior  subordinated
                     convertible  notes due 2001 with the  holders of the common
                     stock in the proceeds of a merger or  consolidation  with a
                     public company as if the 9% senior subordinated convertible
                     notes due 2001 were fully  converted  into common  stock on
                     the   trading   day   immediately   preceding   the  public
                     announcement of such merger or consolidation;

              o      similar   participation  by  the  holders  of  the  related
                     warrants  in the event our  merger  or  consolidation  with
                     another company would constitute a dilutive event under the
                     terms of the warrants; and

              o      prohibition   against  selling  or   transferring   all  or
                     substantially  all of our assets  without prior approval of
                     the holders of the 9% senior subordinated convertible notes
                     due 2001.



<PAGE>



Certain covenants made and default  provisions agreed to, in connection with the
issuance  of the 9%  senior  subordinated  convertible  notes  may also have the
effect of limiting our ability to obtain  additional  financing  and issue other
securities.  In addition,  we are prohibited  from obtaining  additional  senior
indebtedness  for  borrowed  money in excess of an  aggregate  of $12.0  million
unless such indebtedness expressly provides that it is not senior or superior to
the 9% senior subordinated convertible notes.

Conversion  of the 9% senior  subordinated  convertible  notes  would  result in
dilution to the holders of our common stock

The 9% senior subordinated  convertible notes are convertible into shares of our
common  stock at  variable  rates based on future  trading  prices of our common
stock and on events that may occur in the future. In addition, we have agreed to
pay future  interest in additional 9% senior  subordinated  notes due 2001.  The
number of shares of common stock that may  ultimately be issued upon  conversion
is therefore presently indeterminable and could fluctuate significantly based on
the issuance by us of other securities.  The 9% senior subordinated  convertible
notes and related  warrants also have  anti-dilution  protection and may require
the  issuance of more  shares than  originally  anticipated.  These  factors may
result in substantial future dilution to the holders of our common stock.

Certain  provisions  of the 9% senior  subordinated  convertible  notes may have
negative accounting consequences

In  addition  to the  foregoing,  the  cross  default  provisions  to  our  debt
instruments  and other terms of the 9% senior  subordinated  convertible  notes,
under certain  circumstances,  could lead to a significant  accounting charge to
earnings  and  could  materially  adversely  affect  our  business,  results  of
operations  and  condition.  Such a charge and  potential  other future  charges
relating  to the  provisions  of the 9% senior  subordinated  convertible  notes
financing agreements may negatively impact our earnings (loss) per share and the
market  price of our common  stock both  currently  and in future  periods.  The
convertibility  features of such 9% senior  subordinated  convertible  notes and
subsequent  sales of the common stock  underlying both it and the warrants could
materially  adversely  affect our valuation and the market  trading price of our
shares of common stock.

We may be  required  to make  cash  payments  to the  holders  of the 9%  senior
subordinated convertible notes

In addition, the terms of the 9% senior subordinated  convertible notes prohibit
their holders from converting such notes into more than 1,717,587  shares of our
common  stock.  In the event that we cannot honor  conversions  of the 9% senior
subordinated  convertible  notes  because  they would  result in greater than an
aggregate  of   1,717,587   shares  of  common  stock  being  issued  upon  such
conversions,  then we must convert such  outstanding  principal amount up to the
1,717,587 limit and prepay the remaining outstanding principal amount. We may be
required to prepay the 9% senior subordinated convertible notes if:

              o      the holders of the 9% senior subordinated convertible notes
                     have  already  converted  into  1,717,587  shares of common
                     stock  and  there   remains   a  balance   of  such   notes
                     unconverted; or

              o      the holders of the 9% senior subordinated convertible notes
                     cannot otherwise  convert or resell the common stock issued
                     upon conversion.


Such cash payments would adversely affect our financial condition and ability to
implement  the  business  plan for ISP Channel,  Inc. In  addition,  we would be
required to raise  funds  elsewhere,  and we cannot  assure you that we would be
able to obtain adequate sources of additional capital.

We would not reach the  1,717,587  share limit  unless the  floating  conversion
price feature were in effect and the market price of the common stock fell below
$7.14.  In addition,  if the holders of the 9% senior  subordinated  convertible
notes cannot  convert or resell the common stock  issued upon  conversion  other
than because the  1,717,587  share limit is reached,  the terms of the 9% senior
subordinated  convertible  notes,  in  addition  to other  remedies,  permit the
holders to require us to make cash  payments.  The  maximum  amount of such cash
payments,  assuming the market  price and the  conversion  price were equal,  is
$13.7 million,  without  taking into account any interest that would accrue.  If
the market price and the conversion price are not equal, then the maximum amount
of such cash payments could be significantly higher.

<PAGE>

We  may  not  be  able  to  successfully  implement  our  business  plan  if our
relationship with our cable affiliates is negatively impacted

The  success  of our  business  depends  upon our  relationship  with our  cable
affiliates.   Therefore,   our  success  and  future  business  growth  will  be
substantially  affected  by  economic  and  other  factors  affecting  our cable
affiliates.

We do not have direct contact with our subscribers

Because  subscribers to the ISP Channel  service must subscribe  through a cable
affiliate,  the cable  affiliate  (and not us) will  substantially  control  the
customer  relationship  with the  subscriber.  For  example,  under  many of our
existing  contracts,  cable affiliates are responsible for important  functions,
such as billing for and collecting ISP Channel  subscription  fees and providing
the labor and costs associated with distribution of local marketing materials.

Failure or delay by cable  operators  to upgrade  their  systems  may  adversely
affect subscription levels

Certain ISP Channel  services are dependent on the quality of the cable networks
of our cable affiliates.  Currently, most cable systems are capable of providing
only information  from the Internet to the subscribers,  and require a telephone
line to carry information from the subscriber to the Internet. These systems are
called "one-way" cable systems. Several cable operators have announced and begun
making  upgrades to their systems to increase the capacity of their networks and
to enable traffic both to and from the Internet over their  networks,  so-called
"two-way  capability."  However,  cable system operators have limited experience
with  implementing  such upgrades.  These  investments have placed a significant
strain on the financial,  managerial,  operational  and other resources of cable
system operators, many of which already maintain a significant amount of debt.

Further,  cable operators must  periodically  renew their  franchises with city,
county or state governments.  These governmental bodies may impose technical and
managerial  conditions  before  granting a  renewal,  and these  conditions  may
adversely affect the cable operator's ability to implement such upgrades.

In  addition,   many  cable  operators  may  emphasize   increasing   television
programming  capacity  to compete  with other  forms of  entertainment  delivery
systems, such as direct broadcast satellite, instead of upgrading their networks
for two-way  Internet  capability.  Such upgrades have been,  and we expect will
continue  to be,  subject to change,  delay or  cancellation.  Cable  operators'
failure to complete these upgrades in a timely and  satisfactory  manner,  or at
all, would adversely affect the market for our products and services in any such
operators'  franchise area. In addition,  cable operators may roll-out  Internet
access  systems  that are  incompatible  with  our  high-speed  Internet  access
services.  Any of these  actions  could  have a material  adverse  effect on our
business, financial condition, and prospects.

The  unavailability  of two-way  capability  in certain  markets may  negatively
affect subscription levels

We provide  Internet  services to both one-way and two-way  cable  systems.  For
one-way cable systems,  subscribers receive Internet services over cable systems
and transmit data to the Internet  using a telephone  line return path. In those
circumstances,  our services may not provide the high speed  access,  quality of
experience and  availability  of certain  applications  necessary to attract and
retain subscribers to the ISP Channel service.  Subscribers using a conventional
telephone line return path will experience  upstream data transmission speeds to
the Internet that are provided by their analog modems which is typically 56 kbps
or less. It is not clear what impact the lack of two-way capability will have on
subscription levels for the ISP Channel service.

If we do not obtain exclusive access to cable subscribers, we may not be able to
sustain any meaningful growth

The success of the ISP Channel service is dependent,  in part, on our ability to
gain exclusive access to cable  consumers.  Our ability to gain exclusive access
to cable customers depends upon our ability to develop  exclusive  relationships
with cable  operators  that are dominant  within their  geographic  markets.  We
cannot assure you that affiliated  cable operators will not face  competition in
the  future  or  that  we will be  able  to  establish  and  maintain  exclusive
relationships with cable affiliates.  Currently,  a number of our contracts with
cable operators do not contain  exclusivity  provisions.  Even if we are able to
establish and maintain exclusive  relationships with cable operators,  we cannot
assure the ability to do so on favorable terms or in sufficient quantities to be
profitable.  In addition, we will be excluded from providing Internet over cable
in those areas served by cable operators with exclusive  arrangements with other
Internet service providers.  Our contracts with cable affiliates typically range
from three to seven years,  and we cannot assure you that such contracts will be
renewed on satisfactory terms. If the exclusive  relationship  between either us
and our cable  affiliates  or  between  our  cable  affiliates  and their  cable
subscribers is impaired, if we do not become affiliated with a sufficient number
of cable operators,  or if we are not able to continue our  relationship  with a
cable affiliate once the initial term of its contract has expired, our business,
financial condition and prospects could be materially adversely affected.

<PAGE>

Failure to increase revenues from new products and services, whether due to lack
of market acceptance, competition, technological change or otherwise, would have
a material adverse effect on our business, financial condition and prospects

We expect to continue  extensive  research  and  development  activities  and to
evaluate new product and service  opportunities.  These  activities will require
our continued  investment in research and  development  and sales and marketing,
which could adversely  affect our short-term  results of operations.  We believe
that future revenue growth and profitability  will depend in part on our ability
to  develop  and  successfully  market new  products  and  services.  Failure to
increase revenues from new products and services,  whether due to lack of market
acceptance,  competition,  technological  change  or  otherwise,  would  have  a
material adverse effect on our business financial condition and prospects.

If we fail to manage our expanding business effectively, our business, financial
condition and prospects could be adversely affected

To exploit  fully the market for our  products  and  services,  we must  rapidly
execute our sales strategy while managing  anticipated growth through the use of
effective planning and operating  procedures.  To manage our anticipated growth,
we must, among other things:

     o    continue  to  develop  and  improve  our  operational,  financial  and
          management information systems;

     o    hire and train additional qualified personnel;

     o    continue to expand and upgrade core technologies; and

     o    effectively  manage  multiple  relationships  with various  customers,
          suppliers and other third parties.

Consequently,  such expansion  could place a significant  strain on our services
and support operations,  sales and administrative personnel and other resources.
We may, in the  future,  also  experience  difficulties  meeting  demand for our
products and services.  Additionally,  if we are unable to provide  training and
support  for our  products,  it will take  longer to install  our  products  and
customer  satisfaction  may  be  lower.  We  cannot  assure  that  our  systems,
procedures  or  controls  will be adequate  to support  our  operations  or that
management  will be able to  exploit  fully  the  market  for our  products  and
services. Our failure to manage growth effectively could have a material adverse
effect on our business, financial condition and prospects.

If cable  affiliates  are unable to renew their  franchises  or we are unable to
affiliate with  replacement  operators,  our business,  financial  condition and
prospects could be materially adversely affected

Cable television  companies operate under  non-exclusive  franchises  granted by
local or state  authorities that are subject to renewal and  renegotiation  from
time to time.  A franchise  is  generally  granted for a fixed term ranging from
five to 15 years,  but in many  cases the  franchise  may be  terminated  if the
franchisee  fails to comply with the material  provisions of the franchise.  The
Cable  Television  Consumer  Protection  and  Competition  Act of 1992 prohibits
franchising  authorities from granting exclusive cable television franchises and
from unreasonably refusing to award additional competitive franchises.  This Act
also permits municipal  authorities to operate cable television systems in their
communities without franchises. We cannot assure that cable television companies
having contracts with us will retain or renew their  franchises.  Non-renewal or
termination  of any such  franchises  would  result  in the  termination  of our
contract with the applicable  cable  operator.  If an affiliated  cable operator
were to lose its franchise, we would seek to affiliate with the successor to the
franchisee.  We cannot,  however,  assure an affiliation with such successor. In
addition,  affiliation  with a successor could result in additional costs to us.
If we cannot affiliate with replacement cable operators, our business, financial
condition and prospects could be materially adversely affected.

<PAGE>

We may lose  cable  affiliates  through  their  acquisition  which  could have a
material adverse effect on our business, financial condition and prospects

Under many of our contracts,  if a cable affiliate is acquired and the acquiring
company chooses not to enter into a contract with us, we may lose our ability to
offer  Internet  services  in the area  served by such  former  cable  affiliate
entirely or on an  exclusive  basis.  Such a loss could have a material  adverse
effect on our business, financial condition and prospects.

We depend on third-party  technology to develop and introduce  technology we use
and the absence of or any  significant  delay in the  replacement of third-party
technology  would  have a material  adverse  effect on our  business,  financial
condition  and  prospects  The markets for the  products and services we use are
characterized by the following:

              o        intense competition;

              o        rapid technological advances;

              o        evolving industry standards;

              o        changes in subscriber requirements;

              o        frequent new product introductions and enhancements; and

              o        alternative service offerings.

Because of these  factors,  we have chosen to rely upon third parties to develop
and  introduce  technologies  that  enhance  our  current  product  and  service
offerings.   If  our  relationship  with  such  third  parties  is  impaired  or
terminated,  then we would have to find other  developers  on a timely  basis or
develop our own technology.  We cannot predict whether we will be able to obtain
the third-party  technology necessary for continued development and introduction
of new and  enhanced  products and  services.  In  addition,  we cannot  predict
whether we will obtain third-party  technology on commercially  reasonable terms
or  replace  third-party   technology  in  the  event  such  technology  becomes
unavailable,  obsolete or  incompatible  with future versions of our products or
services.  The absence of or any significant  delay in the replacement of third-
party technology would have a material adverse effect on our business, financial
condition and prospects.

We depend on third-party suppliers for certain key products and services and any
inability to obtain sufficient key components or to develop  alternative sources
for such  components  could  result  in  delays  or  reductions  in our  product
shipments

We currently  depend on a limited  number of suppliers  for certain key products
and services.  In particular,  we depend on 3Com Corporation and Com21, Inc. for
headend and cable modem  equipment,  Cisco  Systems,  Inc. for specific  network
routing and  switching  equipment,  and,  among  others,  MCIWorldCom,  Inc. for
national Internet backbone  services.  Additionally,  certain of our cable modem
and headend equipment  suppliers are in litigation over their patents.  We could
experience  disruptions  in the  delivery or increases in the prices of products
and services  purchased from vendors as a result of this  intellectual  property
litigation.  We cannot predict when delays in the delivery of key components and
other  products may occur due to shortages  resulting from the limited number of
suppliers, the financial or other difficulties of such suppliers or the possible
limited availability in the suppliers' underlying raw materials. In addition, we
may not have  adequate  remedies  against  such  third  parties  as a result  of
breaches of their  agreements  with us. The inability to obtain  sufficient  key
components or to develop alternative sources for such components could result in
delays or reductions in our product shipments.  If that were to happen, it could
have  a  material  adverse  effect  on  our  customer  relationships,  business,
financial condition, and prospects.

<PAGE>

We depend on  third-party  carriers to maintain  their cable systems which carry
our data and any  interruption  of our operations due to the failure to maintain
their  cable  systems  would have a  material  adverse  effect on our  business,
financial condition and prospects

Our success  will  depend upon the  capacity,  reliability  and  security of the
network  used  to  carry  data  between  our  subscribers  and the  Internet.  A
significant  portion of such network is owned by third parties,  and accordingly
we have no control over its quality and maintenance.  We rely on cable operators
to maintain their cable systems. In addition,  we rely on other third parties to
provide a connection from the cable system to the Internet.  Currently,  we have
transit agreements with MCIWorldCom,  Sprint, and others to support the exchange
of traffic between our network operations center, cable system and the Internet.
The failure of any other link in the delivery chain resulting in an interruption
of our  operations  would  have  a  material  adverse  effect  on our  business,
financial condition and prospects.

Any increase in competition  could reduce our gross margins,  require  increased
spending  by us on  research  and  development  and  sales  and  marketing,  and
otherwise  materially  adversely  affect our business,  financial  condition and
prospects

The markets for our  products and services  are  intensely  competitive,  and we
expect  competition  to  increase  in the future.  Many of our  competitors  and
potential  competitors  have  substantially  greater  financial,  technical  and
marketing  resources,  larger  subscriber  bases,  longer  operating  histories,
greater name recognition and more established relationships with advertisers and
content and  application  providers than we do. Such  competitors may be able to
undertake more extensive  marketing  campaigns,  adopt more  aggressive  pricing
policies and devote substantially more resources to developing Internet services
or online content than we can. Our ability to compete may be further impeded if,
as evidenced by the recent  merger  between AT&T and TCI and the pending  merger
between  AT&T  and  MediaOne,   competitors  utilizing  different  or  the  same
technologies  seek to merge to enhance their  competitive  strengths.  We cannot
predict  whether  we will be able to  compete  successfully  against  current or
future competitors or that competitive pressures faced by us will not materially
adversely  affect our  business,  financial  condition,  prospects or ability to
repay our debts.  Any increase in  competition  could reduce our gross  margins,
require  increased  spending by us on  research  and  development  and sales and
marketing,  and otherwise  materially  adversely affect our business,  financial
condition and prospects. We face competition from many sources, which include:

              o      Other cable-based access providers;

              o      Telephone-based access providers; and

              o      Alternative technologies.

Cable-based access providers

In the  cable-based  segment of the Internet  access  industry,  we compete with
other  cable-based  data services that are seeking to contract with cable system
operators. These competitors include:

     o    Systems  integrators  such as  Excite@Home,  Roadrunner and High Speed
          Access Corp.; and

     o    Internet service providers such as Earthlink Network, Inc., MindSpring
          Enterprises, Inc., and IDT Corporation.

Several cable system operators have begun to provide high-speed  Internet access
services  over  their  existing  networks.  The  largest of these  cable  system
operators are CableVision, Comcast, Cox, MediaOne, TCI and Time Warner. Comcast,
Cox and TCI market  through  Excite@Home,  while Time Warner plans to market the
RoadRunner  service  through Time Warner's own cable systems as well as to other
cable system operators nationwide. In particular,  Excite@Home has announced its
intention to compete directly in the small- to medium-sized cable system market,
where High Speed Access Corp. currently competes as well.


<PAGE>



Telephone-based access providers

Some of our most direct  competitors in the access  markets are  telephone-based
access  providers,   including  incumbent  local  exchange  carriers,   national
interexchange or long distance carriers,  fiber-based competitive local exchange
carriers,  ISPs, online service  providers,  wireless and satellite data service
providers,  and  local  exchange  carriers  that  use  digital  subscriber  line
technologies.  Some of these  competitors are among the largest companies in the
country,  including  AT&T,  MCIWorldCom,  Sprint  and Qwest.  Other  competitors
include BBN, Earthlink,  Netcom, Concentric Network, and PSINet. The result is a
highly competitive and fragmented market.

Some  of  our  potential   competitors  are  offering  diversified  packages  of
telecommunications  services to residential  customers.  If these companies also
offer Internet access service,  then we would be at a competitive  disadvantage.
Many of these companies are offering (or may soon offer)  technologies that will
attempt to compete with some or all of our Internet data service offerings.  The
bases of competition in these markets include:

              o       transmission speed;

              o       security of transmission;

              o       reliability of service;

              o       ease of access;

              o       ratio of price to performance;

              o       ease of use;

              o       content quality;

              o       quality of presentation;

              o       timeliness of content;

              o       customer support;

              o       brand recognition; and

              o       operating experience and revenue sharing.

Alternative technologies

In  addition,   the  market  for  high-speed  data   transmission   services  is
characterized  by several  competing  technologies  that offer  alternatives  to
cable-modem service and conventional  dial-up access.  Competitive  technologies
include  telecom-related  wireline  technologies,  such as  integrated  services
digital network ("ISDN") and digital subscriber line ("DSL")  technologies,  and
wireless   technologies   such  as  local   multipoint   distribution   service,
multichannel  multipoint  distribution  service and various  types of  satellite
services.  Our  prospects may be impaired by Federal  Communications  Commission
("FCC") rules and regulations, which are designed, at least in part, to increase
competition  in video and related  services.  The FCC has also created a General
Wireless  Communications  Service in which licensees are afforded broad latitude
in defining  the nature and service  area of the  communications  services  they
offer. The full impact of the General Wireless Communications Service remains to
be seen. Nevertheless,  all of these new technologies pose potential competition
to our business.  Significant  market  acceptance of  alternative  solutions for
high-speed data transmission could decrease the demand for our services.

We cannot predict  whether and to what extent  technological  developments  will
have  a  material  adverse  effect  on  our  competitive  position.   The  rapid
development of new competing  technologies and standards increases the risk that
current or new competitors could develop products and services that would reduce
the  competitiveness  of our products and services.  If that were to happen,  it
could have a material  adverse effect on our business,  financial  condition and
prospects.

<PAGE>

A  perceived  or actual  failure by us to achieve  or  maintain  high speed data
transmission  could  significantly  reduce  consumer demand for our services and
have  a  material  adverse  effect  on our  business,  financial  condition  and
prospects

Because the ISP Channel  service has been  operational  for a  relatively  short
period of time, our ability to connect and manage a substantial number of online
subscribers at high transmission speeds is unknown.  In addition,  we face risks
related  to  our  ability  to  scale  up to  expected  subscriber  levels  while
maintaining superior performance. While peak downstream data transmission speeds
across  the  cable  network  approaches  30  megabits  per  second in each 6 MHz
channel,   the  actual  downstream  data  transmission  speeds  for  each  cable
subscriber will be significantly slower and will depend on a variety of factors,
including:

          o       actual speed provisioned for the subscriber's cable modem;

          o       quality of the server used to deliver content;

          o       overall Internet traffic congestion;

          o       the number of active subscribers on a given 6 MHz channel
                  at the same time;

          o       the capability of cable modems used; and

          o       the service quality of the cable affiliates' cable networks.

As the  number  of  subscribers  increases,  it may be  necessary  for our cable
affiliates to add  additional 6 MHz channels in order to maintain  adequate data
transmission  speeds  from the  Internet.  These  additions  would  render  such
channels unavailable to such cable affiliates for video or other programming. We
cannot assure you that our cable affiliates will provide additional capacity for
this purpose.  On two-way cable systems,  the  transmission  data channel to the
Internet  is  located in a range not used for  broadcast  by  traditional  cable
networks and is more  susceptible to  interference  than the  transmission  data
channel from the Internet,  resulting in a slower peak transmission speed to the
Internet. In addition to the factors affecting data transmission speeds from the
Internet,  the interference  level in the cable affiliates' data broadcast range
to the Internet can  materially  affect actual data  transmission  speeds to the
Internet.  The actual  data  delivery  speeds  realized by  subscribers  will be
significantly  lower than peak data transmission  speeds and will vary depending
on the subscriber's hardware,  operating system and software configurations.  We
cannot  assure you that we will be able  achieve or maintain  data  transmission
speeds high enough to attract  and retain our  planned  numbers of  subscribers,
especially as the number of subscribers to our services grows.  Consequently,  a
perceived  or actual  failure  by us to  achieve  or  maintain  high  speed data
transmission  could  significantly  reduce  consumer demand for our services and
have  a  material  adverse  effect  on our  business,  financial  condition  and
prospects.

Any damage or failure that causes  interruptions  in our operations could have a
material adverse effect on our business, financial condition and prospects

Our  operations  are  dependent  upon our  ability to  support a highly  complex
network  and avoid  damages  from  fires,  earthquakes,  floods,  power  losses,
telecommunications and satellite failures,  network software flaws, transmission
cable cuts and similar  events.  The occurrence of any one of these events could
cause interruptions in the services we provide.  In addition,  the failure of an
incumbent  local  exchange  carrier or other  service  provider  to provide  the
communications  capacity  we  require,  as  a  result  of  a  natural  disaster,
operational  disruption or any other reason,  could cause  interruptions  in the
services we provide.  Any damage or failure  that  causes  interruptions  in our
operations  could  have a material  adverse  effect on our  business,  financial
condition and prospects.

We  may be  vulnerable  to  unauthorized  access,  computer  viruses  and  other
disruptive problems which may result in our liability to our subscribers and may
deter others from becoming subscribers

<PAGE>

While we have taken substantial security measures,  our networks or those of our
cable affiliates may be vulnerable to unauthorized access,  computer viruses and
other  disruptive  problems.  Internet  service  providers  and  online  service
providers  have  experienced  in the past,  and may  experience  in the  future,
interruptions in service as a result of the accidental or intentional actions of
Internet users.  Unauthorized  access by current and former  employees or others
could also  potentially  jeopardize  the  security of  confidential  information
stored in our  computer  systems and those of our  subscribers.  Such events may
result in our  liability to our  subscribers  and may deter others from becoming
subscribers,  which  could  have a  material  adverse  effect  on our  business,
financial  condition  and  prospects.  Although  we  intend  to  continue  using
industry-standard security measures, such measures have been circumvented in the
past, and we cannot assure you that these measures will not be  circumvented  in
the future.  Moreover,  we have no control over the security  measures  that our
cable  affiliates  adopt.  Eliminating  computer  viruses and alleviating  other
security  problems  may cause our  subscribers  delays due to  interruptions  or
cessation of service.  Such delays could have a material  adverse  effect on our
business, financial condition and prospects.

If the market for high-quality content fails to develop, or develops more slowly
than  expected,  our  business,   financial  condition  and  prospects  will  be
materially adversely affected

A key  part of our  strategy  is to  provide  Internet  users a more  compelling
interactive  experience than the one currently available to customers of dial-up
Internet  service  providers and online service  providers.  We believe that, in
addition  to  providing  high-speed,  high-performance  Internet  access,  to be
successful we must also develop and aggregate  high-quality  multimedia content.
Our success in providing and aggregating such content will depend in part on:

     o    our  ability  to  develop a  customer  base  large  enough to  justify
          investments in the development of such content;

     o    the ability of content  providers  to create and support  high-quality
          multimedia content; and

     o    our ability to aggregate  content  offerings  in a manner  subscribers
          find attractive.

We cannot assure you that we will be successful in these endeavors.
In addition,  the market for high-quality  multimedia  Internet content has only
recently  begun to develop  and is rapidly  evolving,  and there is  significant
competition  among Internet service  providers and online service  providers for
obtaining such content.  If the market fails to develop, or develops more slowly
than expected, or if competition  increases,  or if our content offerings do not
achieve or sustain  market  acceptance,  our business,  financial  condition and
prospects will be materially adversely affected.

Our failure to attract advertising  revenues in quantities and at rates that are
satisfactory  to us  could  have a  material  adverse  effect  on our  business,
financial condition and prospects

The  success of the ISP Channel  service  depends in part on our ability to draw
advertisers to the ISP Channel.  We expect to derive  significant  revenues from
advertisements  placed on  co-branded  and ISP  Channel  web  pages  and  "click
through"  revenues from products and services  purchased  through links from the
ISP  Channel to  vendors.  We believe  that we can  leverage  the ISP Channel to
provide  demographic  information  to  advertisers  to help them  better  target
prospective  customers.  Nonetheless,  we have  not  generated  any  significant
advertising revenue yet and we cannot assure you that advertisers will find such
information  useful  or will  choose  to  advertise  through  the  ISP  Channel.
Therefore,  we cannot  assure  you that we will be able to  attract  advertising
revenues in quantities and at rates that are  satisfactory to us. The failure to
do so could have a material adverse effect on our business,  financial condition
and prospects.

If we are unsuccessful in establishing and maintaining the ISP Channel brand, or
if we incur  excessive  expenses in promoting  and  maintaining  our brand,  our
business,  financial  condition  and  prospects  would be  materially  adversely
affected

We believe that  establishing and maintaining the ISP Channel brand are critical
to attract and expand our  subscriber  base.  Promotion of the ISP Channel brand
will depend on several factors, including:


<PAGE>



     o    our  success  in  providing  high-speed,   high-quality  consumer  and
          business Internet products, services and content;

     o    the marketing efforts of our cable affiliates; and

     o    the reliability of our cable affiliates' networks and services.

We cannot assure you that any of these factors will be achieved.  We have little
control over our cable affiliates' marketing efforts or the reliability of their
networks and services.

If consumers and  businesses do not perceive our existing  products and services
as high  quality or we  introduce  new  products  or  services or enter into new
business  ventures that are not favorably  received by consumers and businesses,
then we will be unsuccessful in building brand  recognition and brand loyalty in
the  marketplace.  In  addition,  to the extent that the ISP Channel  service is
unavailable,  we risk frustrating potential subscribers who are unable to access
our products and services.

Furthermore,  we may need to devote substantial resources to create and maintain
a distinct brand loyalty among customers, to attract and retain subscribers, and
to promote and maintain the ISP Channel brand in a very competitive  market.  If
we are  unsuccessful  in establishing or maintaining the ISP Channel brand or if
we incur  excessive  expenses  in  promoting  and  maintaining  our  brand,  our
business,  financial  condition  and  prospects  would be  materially  adversely
affected.

If we encounter  significant  problems with our billing and collections process,
our business,  financial  condition and prospects could be materially  adversely
affected

We have recently begun the process of designing and implementing our billing and
collections  system  for the ISP  Channel  service.  We  intend  to bill for our
services over the Internet and, in most cases, to collect these invoices through
payments  initiated via the  Internet.  Such invoices and payments have security
risks.  Given the  complexities  of such a system,  we cannot assure you that we
will be successful in developing  and launching the system in a timely manner or
that we will be able to scale the system  quickly and  efficiently if the number
of subscribers requiring such a billing format increases.  Currently,  our cable
affiliates are  responsible  for billing and collection for our Internet  access
services.  As a result,  we have  little or no  control  over the  accuracy  and
timeliness of the invoices or over collection efforts.

Given our  relatively  limited  history with billing and collection for Internet
services,  we cannot  predict the extent to which we may experience bad debts or
our ability to minimize  such bad debts.  If we encounter  significant  problems
with our billing and collections process, our business,  financial condition and
prospects could be materially adversely affected.

We may face potential  liability for defamatory or indecent  content,  which may
cause us to modify the way we provide services

Any  imposition  of  liability  on our  company for  information  carried on the
Internet  could  have a  material  adverse  effect  on our  business,  financial
condition  and  prospects.  The law relating to  liability  of Internet  service
providers  and  online  service   providers  for   information   carried  on  or
disseminated through their networks is currently unsettled. A number of lawsuits
have  sought to  impose  such  liability  for  defamatory  speech  and  indecent
materials.   Congress  has   attempted  to  impose  such   liability,   in  some
circumstances, for transmission of obscene or indecent materials. In one case, a
court  has held that an  online  service  providers  could be found  liable  for
defamatory  matter provided through its service,  on the ground that the service
provider  exercised  active  editorial  control  over  postings to its  service.
Because of the  potential  liability for  materials  carried on or  disseminated
through our systems, we may have to implement measures to reduce our exposure to
such  liability.  Such  measures  may require  the  expenditure  of  substantial
resources or the discontinuation of certain products or services.


<PAGE>

We may face potential  liability for  information  retrieved and replicated that
may not be covered by our insurance

Our liability  insurance may not cover  potential  claims  relating to providing
Internet  services or may not be adequate to indemnify us for all liability that
may be imposed. Any liability not covered by insurance or in excess of insurance
coverage  could  have a  material  adverse  effect  on our  business,  financial
condition and prospects. Because subscribers download and redistribute materials
that are cached or replicated by us in  connection  with our Internet  services,
claims  could be made  against us or our cable  affiliates  under both U.S.  and
foreign law for defamation,  negligence, copyright or trademark infringement, or
other  theories  based on the nature and content of such  materials.  You should
know that these types of claims have been  successfully  brought  against online
service providers. In particular, copyright and trademark laws are evolving both
domestically  and  internationally,  and it is uncertain  how broadly the rights
provided  under  these  laws  will be  applied  to  online  environments.  It is
impossible  for us to determine  who the  potential  rights  holders may be with
respect to all materials available through our services.  In addition,  a number
of third-party owners of patents have claimed to hold patents that cover various
forms of online transactions or online technology.  As with other online service
providers, patent claims could be asserted against us based upon our services or
technologies.

Our success  depends  upon the  development  of new products and services in the
face of rapidly evolving technology

Our products and services may not be commercially successful

Our  future  development  efforts  may not  result  in  commercially  successful
products and  services or our products and services may be rendered  obsolete by
changing  technology,  new industry  standards or new product  announcements  by
competitors.

For example,  we expect digital  set-top boxes capable of supporting  high-speed
Internet access services to be commercially available in the next 18 months. Set
top boxes will enable  subscribers  to access the  Internet  without a computer.
Although the widespread  availability of set-top boxes could increase the demand
for our Internet service, the demand for set-top boxes may never reach the level
we and industry  experts  have  estimated.  Even if set-top  boxes do reach this
level of popularity,  we cannot assure you that we will be able to capitalize on
such  demand.  If this  scenario  occurs or if other  technologies  or standards
applicable  to our  products  or  services  become  obsolete  or  fail  to  gain
widespread  commercial  acceptance,  then our business,  financial condition and
prospects will be materially adversely affected.

Our ability to adapt to changes in  technology  and industry  standards,  and to
develop and  introduce  new and enhanced  products and service  offerings,  will
determine  whether we can maintain or improve our  competitive  position and our
prospects for growth.  However,  the following factors may hinder our efforts to
introduce and sell new products and services:

     o    rapid  technological  changes in the Internet  and  telecommunications
          industries;

     o    the lengthy  product  approval and purchase  process of our customers;
          and

     o    our reliance on  third-party  technology  for the  development  of new
          products and services.

Our suppliers' products may become obsolete, requiring us to purchase additional
inventory

The  technology  underlying  our capital  equipment,  such as headends and cable
modems,  continues  to evolve  and,  accordingly,  our  equipment  could  become
out-of-date or obsolete prior to the time we originally  intended to replace it.
If this  occurs,  we may need to  purchase  substantial  amounts of new  capital
equipment, which could have a material adverse effect on our business, financial
condition and prospects.


<PAGE>



Our competitors' products may make our products less commercially viable

The  introduction  by our  competitors  of products or  services  embodying,  or
purporting to embody, new technology could also render our existing products and
services,  as well as products  or  services  under  development,  obsolete  and
unmarketable.  Internet,  telecommunications and cable technologies are evolving
rapidly. Many large corporations,  including large telecommunications providers,
regional Bell operating companies and telecommunications equipment providers, as
well as  large  cable  system  operators,  regularly  announce  new and  planned
technologies  and  service  offerings  that  could  impact  the  market  for our
services.  The announcements can delay purchasing decisions by our customers and
confuse the marketplace  regarding  available  alternatives.  Such announcements
could, in the future,  adversely  impact our business,  financial  condition and
prospects.

In addition,  we cannot assure you that we will have the financial and technical
resources  necessary  to  continue  successful  development  of new  products or
services based on emerging  technologies.  Moreover, due to intense competition,
there may be a time-limited market opportunity for our cable- based consumer and
business Internet services.  Our services may not achieve widespread  acceptance
before  competitors  offer  products  and  services  with speed and  performance
similar to our current offerings.  In addition,  the widespread  adoption of new
Internet or telecommuting  technologies or standards,  cable-based or otherwise,
could require  substantial and costly  modifications to our equipment,  products
and  services  and  could  fundamentally  alter  the  character,  viability  and
frequency of Internet-based  advertising,  either of which could have a material
adverse effect on our business, financial condition and prospects.

Our purchase of Intellicom subjects us to risks in a new market in which we have
no experience

On February 9, 1999,  we  completed  our purchase of  Intellicom,  a provider of
two-way  satellite  Internet  access options using very small aperture  terminal
("VSAT") technology.  As with mergers generally,  this merger presents important
challenges  and risks.  Achieving  the  anticipated  benefits of the merger will
depend,  in part, upon whether the integration of the two companies'  businesses
is achieved in an efficient,  cost-effective  and timely  manner,  but we cannot
assure that this will occur.  The  successful  combination of the two businesses
will  require,  among other things,  the timely  integration  of the  companies'
product and service  offerings and the  coordination of the companies'  research
and development  efforts.  Because we only recently completed the acquisition of
Intellicom, we cannot assure you that integration will be accomplished smoothly,
on time or  successfully.  Although  the  management  teams of both  SoftNet and
Intellicom believe that the merger will benefit both companies, we cannot assure
you that the merger will be successful.

The purchase of Intellicom  involves other risks  including  potential  negative
effects on our reported results of operations from  acquisition-related  charges
and amortization of acquired technology and other intangible assets. As a result
of the Intellicom  acquisition,  we anticipate recording a significant amount of
intangible  assets in the  second  quarter of fiscal  1999 which will  adversely
affect our earnings and profitability for the foreseeable  future. If the amount
of such recorded intangible assets is increased or we have future losses and are
unable to  demonstrate  our ability to recover the amount of  intangible  assets
recorded  during  such  time  periods,  the  period  of  amortization  could  be
shortened,  which may further  increase  annual  amortization  charges.  In such
event,  our business and financial  condition  could be materially and adversely
affected. In addition,  the Intellicom  acquisition was structured as a purchase
by us of all of the outstanding  stock of Intellicom.  As a result,  we could be
adversely  affected by direct and contingent  liabilities  of Intellicom.  It is
possible that we are not aware of all of the  liabilities of Intellicom and that
Intellicom has greater liabilities than we expected.  In addition,  we have very
little  experience in the markets and technology in which Intellicom is focused.
As such, we are faced with risks that are new to us, including the following:

Dependence on VSAT market

One of the reasons we  purchased  Intellicom  was to be able to provide  two-way
satellite  Internet  access  options  to  our  customers  using  VSAT  satellite
technology.  However,  the market for VSAT communications  networks and services
may not continue to grow or VSAT  technology  may be replaced by an  alternative
technology.  A  significant  decline in this  market or the  replacement  of the
existing VSAT technology by an alternative technology could adversely affect our
business, financial condition and prospects.

<PAGE>

Risk of damage, loss or malfunction of satellite

The loss, damage or destruction of any of the satellites used by Intellicom,  or
a temporary or permanent  malfunction of any of these  satellites,  would likely
result in interruption of Internet services we provide over the satellites which
could adversely affect our business, financial condition and prospects.

In addition,  use of the  satellites  to provide  Internet  services  requires a
direct line of sight  between the satellite and the cable headend and is subject
to distance and rain  attenuation.  In certain  markets which  experience  heavy
rainfall,  transmission  links must be  engineered  for  shorter  distances  and
greater power to maintain  transmission  quality.  Such engineering  changes may
increase the cost of providing service.  In addition,  such engineering  changes
may require FCC approval, and we cannot assure you that the FCC would grant such
approval.

Equipment failure and interruption of service

Our  operations   will  require  that  our  network,   including  the  satellite
connections,  operate on a  continuous  basis.  It is not unusual for  networks,
including switching facilities and satellite connections, to experience periodic
service  interruption and equipment failures.  It is therefore possible that the
network  facilities  we use may from time to time  experience  interruptions  or
equipment failures, which would negatively affect consumer confidence as well as
our business operations and reputation.

Dependence on leases for satellites

Intellicom  currently leases satellite space from GE American and Satmex. If for
any reason, the leases were to be terminated, we cannot assure you that we could
renegotiate new leases with GE American, Satmex or another satellite provider on
favorable  terms,  if at all. We have not identified  alternative  providers and
believe that any new leases would probably be more costly to us. In any case, we
cannot assure you that an  alternative  provider of satellite  services would be
available, or, if available, would be available on terms favorable to us.

Competition

The market for Internet  access  services is extremely  competitive.  Intellicom
believes  that its  ability to  compete  successfully  depends  upon a number of
factors, including: market presence; the capacity,  reliability, and security of
its  network  infrastructure;  the  pricing  policies  of  its  competitors  and
suppliers; and the timing and release of new products and services by Intellicom
and its  competitors.  We  cannot  assure  you that  Intellicom  will be able to
successfully compete with respect to these factors.

Government regulation

The VSAT  satellite  industry  is a highly  regulated  industry.  In the  United
States,  operation and use of VSAT satellites requires licenses from the FCC. As
a lessee of satellite space, we could in the future be indirectly subject to new
laws, policies or regulations or changes in the interpretation or application of
existing  laws,  policies or  regulations,  that  modify the present  regulatory
environment in the United States.

While we believe that our lessors  will be able to obtain all U.S.  licenses and
authorizations  necessary to operate  effectively,  we cannot assure you that we
our lessors will be  successful  in doing so. Our failure to  indirectly  obtain
some or all necessary licenses or approvals could have a material adverse effect
on our business, financial condition and prospects.

If we  are  unable  to  successfully  integrate  future  acquisitions  into  our
operations, then our results and financial condition may be adversely affected

In addition  to the recent  acquisition  of  Intellicom,  we may  acquire  other
businesses  that we believe will  complement  our existing  business.  We cannot
predict if or when any  prospective  acquisitions  will occur or the  likelihood
that they will be completed on favorable  terms.  Acquiring a business  involves
many risks, including:


<PAGE>



     o    potential   disruption  of  our  ongoing  business  and  diversion  of
          resources and management time;

     o    incurrence of unforeseen obligations or liabilities;

     o    possible  inability  of  management  to  maintain  uniform  standards,
          controls, procedures and policies;

     o    difficulty assimilating the acquired operations and personnel;

     o    risks of entering  markets in which we have little or no direct  prior
          experience; and

     o    potential impairment of relationships with employees or customers as a
          result of changes in management.

We cannot assure that we will make any  acquisitions  or that we will be able to
obtain  additional  financing  for  such  acquisitions,  if  necessary.  If  any
acquisitions  are made,  we cannot  assure that we will be able to  successfully
integrate  the  acquired  business  into our  operations  or that  the  acquired
business will perform as expected.

Loss of key personnel may disrupt our operations

The loss of key personnel may disrupt our operations.  Our success  depends,  in
large part, on our ability to attract and retain qualified technical, marketing,
sales and  management  personnel.  With the  expansion  of the ISP  Channel  and
Intellicom   services,   we  are  currently  seeking  new  employees.   However,
competition  for such personnel is intense in our business,  and thus, we may be
unsuccessful in our hiring efforts. To launch the ISP Channel service concept on
a large-scale  basis, we have recently  assembled a new management team, most of
whom have been with us for less than six  months.  The loss of any member of the
new team,  or failure to attract  or retain  other key  employees,  could have a
material adverse effect on our business, financial condition and prospects.

Direct and indirect government regulation can significantly impact our business

Currently,  neither  the FCC nor  any  other  federal  or  state  communications
regulatory  agency directly  regulates  Internet access services provided by our
cable systems.  However,  any changes in law or regulation  relating to Internet
connectivity,  cable  operators or  telecommunications  markets could affect the
nature,  scope and  prices of our  services.  Such  changes  include  those that
directly  or  indirectly  affect  costs,  limit  usage  of  subscriber-  related
information   or  increase  the   likelihood  or  scope  of   competition   from
telecommunications companies or other Internet access providers.

Possibility of changes in law or regulation

Because the  provision of Internet  access  services  using cable  networks is a
relatively recent  development,  the regulatory  classification of such services
remains  unsettled.  Some parties  have argued that  providing  Internet  access
services  over a cable  network  is a  "telecommunications  service"  and  that,
therefore,  Internet  access service  providers  should be subject to regulation
which, under the Communications Act of 1934, apply to telephone companies. Other
parties have argued that  Internet  access  services  over the cable system is a
cable service under the Communications Act, which would subject such services to
a  different  set of laws and  regulations.  It is unclear at this time  whether
federal,  state, or local governing  bodies will adopt one  classification  over
another,  or adopt another regulatory  classification  altogether,  for Internet
access services provided over cable systems. The FCC recently decided to address
Internet  access  issuers in its  February 17, 1999 order  approving  the merger
between AT&T and TCI, which was announced by the two companies on June 24, 1998.

<PAGE>

A number of parties had opposed the merger  unless the FCC required the AT&T/TCI
combination  to provide  unaffiliated  ISPs with  unbundled,  open access to the
cable platform whenever that platform is being used by an AT&T/TCI  affiliate to
provide  Internet  service.  Other  parties  argued that the FCC should  examine
industry-wide issues surrounding open access to cable-provided  Internet service
in a generic rulemaking, rather than in the specific,  adjudicatory context of a
merger  evaluation.  The FCC decided  that it would be imprudent to grant either
request for action at this time given the nascent stage in the  development  and
deployment of high-speed  Internet access services.  Certain local jurisdictions
that  approved the AT&T/TCI  merger have imposed open access  conditions on such
approval,  while other such local jurisdictions have rejected such conditions or
have reserved the right to impose such  conditions  in the future.  At least one
federal district court has upheld the local  jurisdiction's  decision to mandate
open  access.  We cannot  predict  the  ultimate  outcome  or scope of the local
approval  process.  Nor can we predict the impact,  if any, that future federal,
state or local legal or regulatory  changes,  including open access  conditions,
might have on our business.

Regulations  affecting the cable  industry may discourage  cable  operators from
upgrading their systems

Regulation  of  cable  television  may  affect  the  speed at  which  our  cable
affiliates upgrade their cable infrastructures to two-way cable. Currently,  our
cable  affiliates  have generally  elected to classify the  distribution  of our
services  as  "additional  cable  services"  under  their  respective  franchise
agreements,  and accordingly pay franchise fees. However,  the election by cable
operators to classify  Internet  access as an  additional  cable  service may be
challenged  before  the FCC,  the  courts  or  Congress,  and any  change in the
classification  of  service  could  have a  potentially  adverse  impact  on our
company.

Our cable affiliates may be subject to multiple  franchise fees for distributing
our services

Another possible risk is that local franchise  authorities may subject the cable
affiliates to higher or additional  franchise fees or taxes or otherwise require
them to obtain  additional  franchises in connection  with  distribution  of our
services.  There are  thousands of franchise  authorities  in the United  States
alone,  and  thus  it  will  be  difficult  or  impossible  for us or our  cable
affiliates to operate under a unified set of franchise requirements.

Possible  negative  consequences  if cable  operators  are  classified as common
carriers

If the FCC or another  governmental  agency classifies cable system operators as
"common carriers" or "telecommunications carriers" because they provide Internet
services,  or if cable system operators themselves seek such classification as a
means of limiting their liability, we could lose our rights as the exclusive ISP
for some of our cable affiliates and we or our cable affiliates could be subject
to common carrier regulation by federal and state regulators.

Import restrictions may affect the delivery schedules and costs of supplies from
foreign shippers

In addition, we obtain some of the components for our products and services from
foreign  suppliers  which may be subject  to  tariffs,  duties and other  import
restrictions.  Any changes in law or regulation including those discussed above,
whether in the United States or elsewhere, could materially adversely affect our
business, financial condition and prospects.

Failure to sell MTC in a timely  manner  could  adversely  affect our ability to
implement our business plan

We have  announced  the planned  sale of MTC. We intend to apply the proceeds of
such a sale toward the  repayment  of debt and the  expansion of the ISP Channel
service. However, we cannot assure you that these efforts will be successful. In
the  absence  of such a sale,  management's  attention  could  be  substantially
diverted  to operate or  otherwise  dispose of MTC. If a sale of MTC is delayed,
its value could be diminished. Moreover, MTC could incur losses and operate on a
negative  cash flow basis in the future.  Thus,  any delay in finding a buyer or
failure  to sell this  division  could  have a  material  adverse  effect on our
business, financial condition and prospects.

We do not intend to pay dividends

We have not historically  paid any cash dividends on our common stock and do not
expect to declare any such dividends in the foreseeable  future.  Payment of any
future  dividends  will depend upon our earnings and capital  requirements,  our
debt  obligations and other factors the board of directors  deems  relevant.  We
currently intend to retain our earnings,  if any, to finance the development and
expansion of the ISP Channel  service.  Our  certificate  of  incorporation  (1)
prohibits  the  payment of cash  dividends  on our  common  stock,  without  the
approval of the holders of the preferred  stock and (2) upon  liquidation of our
company,  requires  us to pay the  holders of the  convertible  preferred  stock
before we make any payments to the holders of our common stock.  You should also
know that some of our financing agreements restrict our ability to pay dividends
on our common stock.


<PAGE>



Our stock price is volatile

The  volatility  of our stock  price may make it  difficult  for  holders of the
common stock to transfer  their shares at the prices they want. The market price
for our common stock has been  volatile in the past,  and several  factors could
cause the price to fluctuate substantially in the future. These factors include:

       o    announcements of developments related to our business;

       o    fluctuations in our results of operations;

       o    sales of substantial amounts of our securities into the marketplace;

       o    general conditions in our industries or the worldwide economy;

       o    an outbreak of war or hostilities;

       o    a shortfall in revenues or earnings compared to securities analysts'
            expectations;

       o    changes in analysts' recommendations or projections;

       o    announcements of new products or services by us or our competitors;
            and

       o    changes in our relationships with our suppliers or customers.

The market price of our common stock may fluctuate  significantly in the future,
and these fluctuations may be unrelated to our performance. General market price
declines or market  volatility in the future could adversely affect the price of
our common stock,  and thus,  the current  market price may not be indicative of
future market prices.

Prospective anti-takeover provisions could negatively impact our stockholders

We are a Delaware  corporation.  The Delaware  General  Corporation Law contains
certain provisions that may discourage, delay or make a change in control of our
company  more  difficult  or prevent  the  removal of  incumbent  directors.  In
addition,  our certificate of incorporation  and bylaws have certain  provisions
that have the same effect.  These  provisions may have a negative  impact on the
price of our common stock and may discourage  third-party  bidders from making a
bid for our company or may reduce any premiums  paid to  stockholders  for their
common stock.

The Year 2000 issue could harm our operations

Many  computer  programs  have been written using two digits rather than four to
define the  applicable  year.  This  poses a problem  at the end of the  century
because such computer  programs would not properly  recognize a year that begins
with "20" instead of "19." This, in turn,  could result in major system failures
or  miscalculations  that could disrupt our business.  We have  formulated a Y2K
Plan to address our Y2K issues and have  created a Y2K Task Force  headed by the
Director of Information Systems and Data Services to implement the plan. Our Y2K
Plan has six phases:

1.                Organizational Awareness:  educate our employees, senior
                  management, and the board of directors about the Y2K issue.

2.                Inventory: complete inventory of internal business systems and
                  their relative priority to continuing business operations.  In
                  addition, this phase includes a complete inventory of critical
                  vendors,  suppliers  and  services  providers  and  their  Y2K
                  compliance status.

3.                Assessment:   assessment  of  internal  business  systems  and
                  critical  vendors,  suppliers and service  providers and their
                  Y2K compliance status.

<PAGE>

4.                Planning:  preparing the individual  project plans and project
                  teams and other  required  internal and external  resources to
                  implement the required solutions for Y2K compliance.

5.                Execution:  implementation of the solutions and fixes.

6.                Validation:  testing the solutions for Y2K compliance.

Our Y2K Plan will apply to two areas:

1.    Internal business systems

2.    Compliance by external customers and providers

Internal business systems

Our internal  business systems and workstation  business  applications will be a
primary  area  of  focus.  We are in  the  unique  position  of  completing  the
implementation  of new  enterprise-wide  business  solutions to replace existing
manual processes and/or "home grown"  applications  during 1999. These solutions
are  represented by their vendors as being fully Y2K compliant.  We have few, if
any, "legacy" applications that will need to be evaluated for Y2K compliance.

We completed the Inventory,  Assessment and Planning Phases of substantially all
critical internal business systems.  The Execution and Validation Phases will be
completed by the fourth quarter of fiscal 1999. We expect to be Y2K compliant on
all critical systems, which rely on the calendar year, before December 31, 1999.

Some  non-critical  systems  may not be  addressed  until  after  January  2000.
However,  we believe such systems will not cause significant  disruptions in our
operations.

Compliance by external customers and providers

We are in the process of the  inventory  and  assessment  phases of our critical
suppliers,  service  providers and  contractors to determine the extent to which
the our interface  systems are  susceptible to those third  parties'  failure to
remedy their own Y2K issues.  We expect that  assessment will be complete by the
fourth  quarter of calendar  1999. To the extent that responses to Y2K readiness
are  unsatisfactory,  we  intend  to  change  suppliers,  service  providers  or
contractors to those that have demonstrated Y2K readiness.  We cannot be assured
that we will be  successful  in  finding  such  alternative  suppliers,  service
providers  and  contractors.  We do not  currently  have any formal  information
concerning the status of our customers but have received  indications  that most
of our customers are working on Y2K compliance.

Risks associated with Y2K

We believe  the major risk  associated  with the Y2K issue is the ability of our
key business partners and vendors to resolve their own Y2K issues. We will spend
a great  deal of time  over  the  next  several  months,  working  closely  with
suppliers and vendors, to assure their compliance.

Should a  situation  occur  where a key  partner  or vendor is unable to resolve
their  Y2K  issue,  we  expect to be in a  position  to change to Y2K  compliant
partners and vendors.

Costs to address Y2K issues

Because  we are in the  unique  position  of  implementing  new  enterprise-wide
business  solutions to replace  existing  manual  processes  and/or "home grown"
applications,  there will be little,  if any,  Y2K changes  required to existing
business applications.  All of the new business applications  implemented (or in
the  process  of  being  implemented  in 1999)  are  represented  as  being  Y2K
compliant.

<PAGE>

We  currently  believe that  implementing  our Y2K Plan will not have a material
effect on our financial position.

Contingency Plan

We have not  formulated  a  contingency  plan at this  time but  expect  to have
specific contingency plans in place prior to September 30, 1999.

Summary

We anticipate that the Y2K issue will not have a material  adverse effect on the
financial  position  or results of our  operations.  There can be no  assurance,
however, that the systems of other companies or government entities, on which we
rely for supplies, cash payments, and future business, will be timely converted,
or that a failure to convert by another  company or government  entities,  would
not have a  material  adverse  effect on our  financial  position  or results of
operations. If third-party suppliers,  service providers and contractors, due to
Y2K issues, fail to provide us with components, materials, or services which are
necessary  to  deliver  our  service  and  product  offerings,  with  sufficient
electrical power and  transportation  infrastructure  to deliver our service and
product  offerings,  then any such failure could have a material  adverse effect
our ability to conduct business,  as well as our financial  position and results
of operations.




<PAGE>



Item 6.  Exhibits and Reports on Form 8-K.

     (a) Exhibits

     3.1  Amended and Restated Certificate of Incorporation

     3.2  By-laws  (this  document is hereby  incorporated  by  reference to our
          Registration  Statement  on Form S-3/A filed with the SEC on April 22,
          1999)

     4.1  Article Fourth of the Certificate of Incorporation (see exhibit 3.1)

     4.2  Articles II, VI and VII of the By-laws (see exhibit 3.2)

     10.1 Securities  Purchase Agreement by and among SoftNet Systems,  Inc. and
          Hector  Gonzalez,  dated  April  12,  1999  (this  document  is hereby
          incorporated  by  reference to our Current  Report on Form 8-K,  filed
          with the SEC on April 27, 1999)

     10.2 Registration  Rights Agreement by and among SoftNet Systems,  Inc. and
          Hector  Gonzalez,  dated  April  12,  1999  (this  document  is hereby
          incorporated  by  reference to our Current  Report on Form 8-K,  filed
          with the SEC on April 27, 1999)

     27.1 Financial Data Schedule

     99.1 Proposal Number Two Adopted at the 1999 Annual Meeting of Stockholders
          (this document is hereby  incorporated  by reference to our definitive
          proxy statement on Form 14A, filed with the SEC on March 17, 1999)

     99.2 Proposal Number Six Adopted at the 1999 Annual Meeting of Stockholders
          (this document is hereby  incorporated  by reference to our definitive
          proxy statement on Form 14A, filed with the SEC on March 17, 1999)

(b)   Reports on Form 8-K

         On April 14,  1999,  the  Company  filed a  Current  Report on Form 8-K
         reporting  the  outcome  of  matters  submitted  to a vote of  security
         holders during the Company's annual shareholders' meeting.

         On April 27,  1999,  the  Company  filed a  Current  Report on Form 8-K
         reporting  the sale of  660,000  unregistered  shares of the  Company's
         common stock to one of its cable affiliates.



<PAGE>




                                   SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

SOFTNET SYSTEMS, INC.



/s/ Douglas S. Sinclair
Douglas S. Sinclair
Chief Financial Officer


Dated:  August 16, 1999